Policy, Research, and Extemal Affairs

WORKING PAPERS

Transponr

Intrastructure and Urban DevelopmentDepartment

The World BankMarch 1990WPS 380

Techniques for RailwayRestructuring

Lee W. Huffand

Louis S. Thompson

This document addresses how, not whether, to restructurea railway.

The Policy. Research, and External Affairs Complex distributes PRE Working Papeas to disseminate the findings of work in progressand to cmourage the exchange of ideas among Bank staff and all others intlested in developnent issues. These papars earsy the namesof the authors, reflect only their views, and should be used and cited accordingly. The findings, interpretatims, and conclusions am theauthors' own They should not be attributed to the World Bank, its Board of Directs, its nanagement, or any of its mcmber counties.

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Policy, Research, and Extemal Affairs

Tranitpont

This paper - a product of the Transport Division, Infrastructumt and Urban Development Department-is part of a largereffort in PRE to understand and facilitate the process of institutional reform and enterprisedevelopment. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433.Please contact Sabine Shive, room S10-046, extension 33761 (29 pages".

This report was sponsored by the Union of Emphasis is initially on policy, and as theAfrican Railways, as part of a Sub-Saharan process proceeds on broad understanding andAfrica Transport Project task aimed at defining commitment to the process of change.what is involved in restructuring railways so thatthey behave more like market-driven enterprises. * A contract plan, which defines Lhe roles and

responsibilities of the railway and its owner (theProblems with railway management are gen- government). The contract plan flows from Lhe

erally related to the policy and institutional strategic plan, and should not be developed inframnework within which the railway operates- isolation from relatcd policy and fundingthe behavior of the "enterprise" itself - rather objectives of the government and railway.than to access to technology or capital.

t A management plan, an intemal plan thatThe question addressed in this document is clarifies the objectives of the senior railway

not whether the railway should be restructured, executives and their roles and responsibilities inbut how. relation to the executive director. The targets of

the three plans should not be confused. Operat-The report recommends four types of action ing targets, for example, should not appear in the

to be employed in the process of institutional contract plan, inviting political interference inre.orm: management operations.

- A strategic plan, which defines the environ- * An enabling actions plan, which lists mostment in which the railway will function and fo- of the initiatives that must be taken in conjunc-cuses on the crucial policy issues that will guide tion with implementation of the first three plans.or influence the railway's planning and actions. The focus should be to ensure that the roles andThe objective: to generate a thorough public responsibilities defined will actually be realizeddiscussion of the role the railway should play in law or enforceable agreement.and the costs and benefits of altemative choices.

The PRE Working Paper Series disseminates the findings of work under way in the Bank's Policy, Research. and ExternalAffairs Complex. An objective of the series is to get these findings out quickly, even if presentations are less than fullypolished. The fndings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

Produced at the PRE Dissemination Center

TECHNIQUES FOR RAILWAY RESTRUCTURING

ACKNOWLEDGEMENT

This paper was prepared for the Union of African Railways(uAR) as part of the Sub-Saharan Africa Transport Program (SSATF),Ratlway Management Component - Phase It. At the present stage ofdevelopment, the paper represents the , ninions of Its authors (Lee W.

i Huff, Senior Vice-President. Richard J. arber Associates, Inc., 1828L Street, N.W.. Suite 406. Washington. DC 20036 and Louis S. Thompson,

l Railways Adviser. The World Bank - INUTD), and does not necessarilivi represent the policies of either the World Bank or the Union of AfricanI Raliways.

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PREFACE

In recent years, nations at every level of economic developmenthave shared the costly experience of troubled railway systems. A largebody of analysis has documented the relevant evidence. Governmentsrecognize that no miracle cure Is available and many are beginning thearduous but essential process of achieving serious reform andrestructurIng.

The facts of railway llfe are that If things are already badthey are likely to get much worse unless something Is doneabout them. In fact, It Is often only when It Is seen how muchworse things can get that management and ministers are movedto act on their railway problems. Long-term planning Is ... theonly way In which the employment and other social Implicationsof the necessary changes can be handled In a way which Isacceptable to users, workers, taxpayers and governments.'

This statement, by a former chlef economist at British Rall,particularizes for railways the truth of Professor Parkinson's Law ofDelay In bureaucratic organizations, namely, that delay Is the deadliestform of denial.

ThiS paper Is addressed to those countries which are facing thechallenge of fundamental "restructuring"; the transformation of a troubledstate-owned rallw,y Into a stand-alone enterprise operated on commercialprinciples (even though the government may retain ownership). It providesa framework -- a set of broad actions -- for achieving practical reform.It Is neither a precise road mao to guaranteaed Outcomes, nor a checklist needing only the proper boxes to be marked off, nor a rule book witha set of correct answers. Indeed restructuring railways and theirgovernments will immediately realize that In an Increasingly competitiveworld such P-ecision and certainty do not exist. If they are to succeed,the government and rallway planners who lead the reform effort mustdisplay the same qualities of flexibility, transparency In the assemblyand display of Information, careful assessment of the risks ofalternative courses of action, and prompt and unambiguous declaration ofconclusions reached and actlons to be taken that the reformed railwayIs going to have to show If It Is to succeed In a competitive commercialtransport/logistics environment. Both the reform decision-makers and thereformed railway must be Infused by the same spirit, exchanging thestatic "rules and regulations" code of bureaucracy for the open-mindedand dynamic Imperatives of competitive enterprise. In essence, reformmust become a state of mind.

The paper suggests four general documents around which the reformeffort may be organized:

(1) a Strategic Plan which relates the restructured railwayenteprise to the broader political, social, and economic

context within which It will function and addresses majorpublic policy optlons.

(2) a Contract Plan which defines the specific commitments andobligations flowing from the Strategic Plan which theGovernment and the railway enterprise formally accept astheir respective responsibilities,

(3) a Management Plan for the railway which establishes anorganizational structure, functional responsibilities, andperformance measures for effective Internal managementcontrol, In light of the requirements Imposed by the decisionto operate as a commercial enterprise, and

(4) an *Enabilng Actlons" Plan, as needed, to lst the necessarylegislative, legal, and formal admInistrative changes necessaryto carry out the planned restructuring.

Many develooed and developing countries have had at least someexperience wlth documents of this type, as shown In the box below. Asnoted, this Is a representative but not an all-inclusive list becausemore countries are being added and because It Is not clear exactly tiowto classify certain Initiatives already underway.

Experionce tWith Raoli wav Rostructuring Initiatives: BOX 1ountries Which Havo Instituted

Or Are D-veloping Variour Approaches

Latin Europe, MiddleAmerica` East ad North Developed(LAC) AFRICA Africa (EMENA) ASIA Iountr es

Strategic Plans "Mxico N yae" Hungary Indio Conrail (US)Uruguay Nigeria Pakistan Jo an

Tanzania Bria (Fran7t)Deutsch* Bundoesbhn

Contract Plans Mexico Cameroun Tunisia China SNCFUruguay Kenif Morocco Kohrea

NMglri YugloslaviaSenegal

Management Plans Kenya Korea Britlh RailZaire, Cooe Brits aI

Doutscho Bundxob..

Enabling Actions Plans India ConrailJapan

Note: This io not an all inclusive list. In some cases, also, documents are in very initial stage*.

During the discussion below, the boundaries between the fourdocuments are drawn somewhat more clearly than they actually would beIn practice. In many cases, some functlons or commitments mightaopropriately be shifted from one locument to the other (i.e., from thestrategic plan to the management plan, etc.). Each country must make Itsown decisions In this respect -- what matters Is that each of the majorIssues be Identifled and resolved.

The body of the paper below concerns Itself primarily with outputs--reoorts, contracts and plans--and not with the process whereby theconditions for producing these outputs are achieved. The process issueis sufficiently particular to each country and each raliway to make anexhaustive treatment beyond the scope of this paper. A brlef, overalldiscussion of process may be useful, however, In Droviding a context forwhat follows.

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INTRODUCT ION

The World Bank's reviews of railway crlses 2 show very clearly thatthey do not come about suddenly, nor do they happen by accident.Although the points of emphasis may differ, this conclusion Is Just astrue of rallways In the developed as In the developing world. As a broadgeneralization, railway crises occur because railways have not beenencouraged, or allowed, to respond to changes In the economies theyserve. Long after major segments of rallway traffic have been capturedby competitors which are often privately owned and operated, railwayscontinue to offer services which are not In demand, at prices which areoften far below cost, and wlth a quality of service which Is Inferior tothe customer's needs. Typically also, as the railway becomes a fiscaldrain on an economy already short of resources, longer range maintenanceand capital needs are neglected, further diminishing the railway'scapabilities as the years pass. The longer the problem continues, themore difficult and expensive It Is to resolve, and the more likely It Isto be *put off until next year".

Across all economies and cultures, this situation Is the result ofsome or all of the following forces:

(1) Th.e rallway Is goneraly one of t-e nat,n.s oldet In-atitu-tions, and Its years of history have endowed It with perceivedroles--such as a "public service obligation"--and anassociated engineering and production-oriented managementculture which are uniquely resistant to change.

(2) The railway often has the largest single unionized work forceIn the nation, giving Its workers a great deal of politicalpower which Is used to protect the size of the labor force,even when there Is little productive work to be done.

(3) Over the years, various classes of passengers (typicallycommuters and third class Intercity passengers) and shippers(often agricultural Interests and major government-ownedmining or Industrial enterprises) have been able to persuadethe regulatory authorities of the government to distort therate structure In their favor. The stated rationale for theIntervention In freight rates Is as predictable ("the nationneeds to control freight rates In order to promote exports,or to control Inflation") as the result: nothing positive Isachieved because the resulting deficits are merily shiftedfrom one agency budget to the other, and the managementIncentives of both railway and shipper are badly distorted.Regional Interests also believe that the existence of railservice (but not, necessarily, Its use) Is Important elther tomaintain the local economy, or to protect the possibility ofa desired future development program. Eventually thebeneficlaries of the system of cross subsidies come to believe

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that their favored status Is not only Important to them, butIs also Important to the health of the nation, and they defendtheir positions tenaciously.

(4) The people at large may believe that a railway Is "needed",whether or not It Is economically Justifiable, either becausethey believe that rail service Is a baslc "right" (likeeducation or health), or because they consider the presenceof a railway to be one of the status symbols of nationhood.

(5) The ministry which owns and operales the raliway may be asInterested In protecting Its organ -..mtlonal domain, budget, andpolitical Influence as It Is In serving the needs of shippersor tackling the difficult task of restructuring the railway.

(6) Flnally, many of the Important actual or potential customerseventually switch to other modes because the service mayhave become suffilciently slow and unreliable that It Is nolonger economical to use rail. These former users are nolonger advocates for change and Improvement. Of course, theother beneficlaries of poor rail service, the -ompeting (non-rail) transport modes, are often committed advocates of thestatus quo as well.

.n many Instances, the only agency experiencing Immedlate pressuresfor change Is the finance ministry because ultimately It pays the billsout of the public treasury. At least In the Initial years of a developingcrisis, the result of this financial pressure Is to reduce outlayswherever possible which, unfortunately, typically results In the wellknown downward spiral of deferred maintenance and reduced capitalbudgets (and eventual poor service) noted above. Exper!ence indlcates,however, that financial pressures alone, even when they reach monumen-tal proportions (such as the US $ 10 billion annual losses of theJapanese National Railways before Its restructuring), are rarelysufficlent to bring about the right kind of change; real change happenswhen financial pressure Is combined with a realization by the governmentand railway customers of the true burden Imposed on the economy bypoor, or unnecessary, rail service and with acceptance on the part ofrailway management that an economically rational role for the rallway Isthe best guarantee of long term health and stability for the railway.When this polnt Is reached, the measures discussed later In this paperbecome feasible.

Therefore the real challenge of railway restructuring Is political,not solely financial or technical. Absent political will, there Is no readycombination of financial aid, technical advice, and training which willaccomplish much more than postponing the Inevitable, and In Increasing Itscost when It arrives. The principles of promoting change are well known:the beneficlaries need to be Identif led and organized, and those sufferlngharm need to be assisted. Because of the very wide range of Interestsof the potential benei larnes and adversely affected parties, the veryhighest levels of Pol ical leadership must understand and support aprogram of change. In turn, all agencies of the government must, throughfull and open discussion, understand and accept the Implications ofreform, a stage which will only be reached If the political leadership

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clearly assigns responsibility and authority for the management of changeto an appropriate official -- and makes It clear that results areexpected. The official could be drawn from political circles, from aministry, from the rallway, or, as has happened In several developed anddeveloping countries (e.g., the US, the United Kingdom, France, andUruguay), could be an authoritative and impartial person from ou".sidegovernment and railway. Because the problem Is primarily rooted Insocial and political considerations, the criteria for selecting theofflcial should be broad experience In the operation of large Institutionsand acceptability to all parties, not necessarily expertise In railwayoperation or engineering.

The next step Is to obtaln the support of major users (or potentialusers) of the system and of railway management. The offer to the userIs better and more reliable service In return, In some cases, for higherrates or longer term commitments for traffic. As discussed later, forthose users who cannot, or will not, pay rates that cover costs, explicitsubsidles from public authorities may be warranted when such subsidiescan be justified by legitimate pubilc requirements. The proposal torailway management follows accordingly: although some services may bereduced or eliminated by the reform process, those operations whichremain will give the railway a stable basis for future survival andgrowth, and management will be given much broader authority and autonomyto make decisions with a minimum of outside Interference.

At the same time, those who are truly Injured by the restructuringmust be Identified and dealt with. In some cases, the damage Is solimIted or vague ("we need rail service, even though we do not use It, ..norder to keep the truck sates down"), that no compensation Is due. Inothers, such as the user who has made a legitimate location decision andrelated Investments In the belief that an existing rate structure wouldcontinue, at least some transitlonal assistance, elther through subsidyor phase-in of rate changes, may be needed.

Labor will often be a major Injured 9arty. Much study has been, andcontinues to be directed at this Issue. Although much remains to belearned, and specific approaches will always need to be tailored to theconditions of each country, two broad conclusions are emerging. Flrst,some form of fair compensation and/or assistance In finding otheremployment has been a feature of all successful labor redundancyprograms. For example, In recent loans to the Sudan and to Zaire, thefinancing of compensation (though not necessarily by the World Bank) hasbeen an explicit part of the overall Initiative. In Uruguay, a vigorousprogram of assistance In finding other, often better, employment forredundant employees was a keystone. The second conclusion, however, Isthat the cost of not reducing redundant labor, whether Imposed bygovernment or by labor union pressure, Is often underestimated becausedisgruntled employees can extract a price In poor morale, Inefficient andundisciplined operations, and Inflexibility of service which appears to bequite large, even by comparison with the surplus wage bill. Railways,because of their complexity and the critical requirement for controlledmanagement, are therefore not good places to absorb surplus labor: In

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the Uruguayan reforms, the Government actually concluded that therallway would be better off If the surplus workers were paid to stayhome until alternative arrangements could be made than If they continuedto report to the railway. Taking both the explicit and Implicit costs Intoaccount, the "rate of return" for successful labor redundancy schemes Isvery hlgh, often much higher than any Item on the proposed capitalInvestment programs on the railway's agenda. An acceptable plan foraddressing the Issue of labor force adjustment Is therefore as Impc.rtan..to the success of a reform program as the related chanqes In managementand physical plant.

For many reasons, then, railway restructuring Is an Inharentlymessy process which Is deeply political, often confrontational, anddifficult to predict or control in advance. Such programs take patienceand time, often measured In years. This does not me2n thatreorganization must always take so long; but clearly the process shouldnot be approached casually. A crlsis which develops slowly, as theresult of powerful forces at work, cannot be resolved on the basis ofInstant deeisions. Time Invested at the beginning on planning, on bringingall Interested parties Into the process, and on developing the requireddegree of commitment to change Is always time well spent. The Initiatorcould be the raliway, a government agency, or entirely outside forces,but sustainable progress will not be made until all are working together.If the groundwork Is properly done, the reform process can begin wlthreasonable prospects for success.

As a final Introductory note, the following discussion describes aseries of steps wMiCh could be carried out in considerable detail. Inmany cases, exhaustive detall may not be necessary, or even desirable,certainly at the outset of the process. If choices must be made, It Isfar preferable to place emphasis on Identifying the major policy Issuesand developing solid agreement and understanding among all parties on thenecessary changes than It Is to develop plans or "contracts" which areso complex and sophistIcated that on!y the consultants or expertsunderstand their contents.

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PLAN I

THE STRATEGIC PLAN

The Strategic Plan (SP) must be prepared cooperatively by theGovernment and the railway enterprise, 4 arid ultimately accepted at thehighest levels In each. The SP Is the centerpiece of the restructuringeffort. Its purpose Is to surface for explllt examination all thedifficult public policy questlons which, If left unattended, can scuttleachievement of workable reform. Indeed, one of the reasons whyrestructuring programs have often produced lnitlally unsatisfactoryresults (the case of Conrail Is an excellent example) Is that they weredeveloped without an adequate assessment of critical strategic Issues,due either to lack of Information, neglect or to the unwiliingness of theparties to face up to them (or all threel).

Strategic planning takes many forms. For Instance, It can be arelatively routine exercls% In a corporation that has been preparlng suchplans for many years and .rgages In a stable line of business. The word"plan" Itself suggests a degree of nermanency. In this paper, however,we are discussing strategic planning In the context of making oftenwre,nching changes In the status quo wNlch affect numerous sectors of thepublic. In this settina. Strateoic Plans must be fluid. dvnamic. evolvingdocuments. Rigidity and Inflexibility will result In paralysis and eventualfailure.

The SP Is the primary document for stimulating and guiding thepolicy dialogue between government, railway, and oublic. It Identifiesmajor goals and policy options so that the best and most realisticchoices can be made, and made openly, laying out the Implications for allaffected parties of various policy choices and macroeconomicassumptions, recelving feedback about the acceptability of the outcomesforeseen, and revising the assumptions, policles, and objectivesaccordingly.

In brief, the strategic assessment process will be an Interactiveone. Certalnly, at the outset, several draft or prellminary plans arelikely, and those preparing the SP should expect It to be modified. Thegreater the transparency of this process and the greater the numberof Interested parties actively participating In It, the greater Is thelikelihood of: (a) multiple drafts, and (b) a workable final product. The SPshould be used to draw the widest possl'-,i participation (in part todevelop a political consensus for acceptance of difficult public choices),Including legislators, other government :ncles, regional and provincialauthorities, labor, shippers, acadenmics, financial Institutions, and thetraveling public. It would be rare, and probably Indlcative of unresolvedand buried Issues, If an SP were adopted as originally presented. Wheresuccessful reform has occurred, It has been common for the SP to berecycled several times before stabilizing around a generally acceptablecourse of actlon. Accordingly, sufficient time, resources, and patience

I

must be made available for the completion of this task. As well, the SPbecomes the basis for development of a much more effective ContractPlan and Management Plan. The SP Is the place candidly to raise andresolve the toughest and most challenging questlons about the short termand long term future of the rallway. "in the final analysis the mosteffective universal approagh to decislonmaking Is to ask the rightquestion at the right time."

Establish the Mission and Obactives of the EnterpriseIn the broadest sense, the mission of the restructured and

revitalized railway will be to provide adequate and efficient rail serviceof goods and passongerr by roplleating the behavior of a commerclal,protit-oriented railway enterprise vperating under conditions of adequatecompetition. This means that the railway's approach to providingservices must be demand-driven, customer-orlented, market-determined,results-led -- If the market (or government) will not pay for a gIvenservice, It will not be offered by the rallwa- This does not mean thatthe railway or any of Its assets must neces, "v be privatized; however,Incentives and authority should be created so t.;at It Is In the railway'sInterest, and within Its power, to carry out the mission defined for It.

The primary objective of the enterprise may be framed In variousways, depending on the circumstances and desires In each country. Forpurposes of lI'ustratlon, one plausible definition of the overall goal forthe railway enterprise Is to recover from revenues funds In an amountsufficient to pay the costs of providing the service, meet Interest andprlncipal payments on Its debt, and contribute to new Investment In there!!"wn. Cy,'- - fUntr!eS ba1y ats+4 {or the rtH!way s!m-!y bree!ng even(though the meaning of "break-even" must be carefully explained); othersmay wish the railway to earn clear profits as well, In effect generatingdividends for Its public owners. Ideally, the railway will becomefinanciaily self-sustaining. In many Instances, political and economicrealities will dictate that full achievement of the profit objective bephased In over a period of time, as the railway transitions from Itscurrent situation to one In which It operates routinely as a commerclalenterprise. The Important thing Is to define the objective and set achallenging but realistic timetable for reaching It.

Since many restructurlng railways carry heavy debt burdensaccumulated In the past, decisions must often be made about re-financing.In most of these cases, the reformed railway will be unable to earnenough from farebox and freight charges to pay off old debt, no matterhow well It Is operated. If this condition Is not rectifled, the basis foreffective entrepreneurial management of the rallway will be underminedfrom the beginning. In some fashion, the Government will probably haveto assume many of these obilgations (of course, In some Instances, theGovernment may already hold the debt paper or guarantee It) as part ofa process of providing a revised capital structure of the railway, whichIs approprlate to the new scale and mode of operatlons. The JapaneseGovernment, for example, established a separate Settlements Corpora-

2

tion to absorb most of the debt of the Japanese National Railways (JNR)at the time JNR was restructured.

Given that the objective Is to operate the railway as aconmnerclaily oriented enterprise, It Is possible that governments atvarious levels will still want the raliway to offer certain services(including intire lines) wl.ich cannot, or will not be permitted, to covercosts. In such Instarnes, where the raliway Is given the objective ofoperating certaln uneconomic services In behalf of governments, thegovernments must commit to paying the full cost of these "supported"services In excess of permissible revenue, assuming efficient operationby the raliway. Basically the railway should serve as a contractor tothe Goverrment In these situations. In the SP, the Government mustclearly specify the uneconomic services (and the related financial obliga-tions) which It Is wlliing to support.

Identify Major Market/Service Sectors

Once the railway's objective has been defined, the Government andrailway should Identify the market/service sectors which are to becontinued, expanded, dropped, or Introduced. The shape of this listingIs likely to change as the strategic assessment process proceeds, buta representative Initial set might well Include the following:

(1) Freight - describe major commodities, traffic flows, andvolumes, and the services to be provided (e.g., less than wagonload (LWL), wagon load (WL), block train, specialized equipment,intermodal).

(2) Intercity passenger - describe principal market flows servedand services offered (e.g., 1st, 2nd, and 3rd class, dining,sleeper, express, local, baggage).

(3) Regional and/or suburban commuter - describe services,frequencies, ridership, specialized facillties required, etc.

A list of services and markets that are considered prime candidatesfor discontinuation of service -- e.g., LY"L freight service and passengerservice on remote branch lines -- should also be identif led. This listingIs likely to change In size and composition as the strategic assessmentunfolds. It Is also probable, especlally at the outset of the strategicplanning effort, that the need for physlcal shrinkage In the size of thesystem will be evident on many railways. Thus entire segments of railline will be earmarked as candidates for abandonment.

Flnally, the SP should highiight and evaluate the potential forearning addltlonal Income from various services ancillary to operation ofthe raliway. Following Is a partial llsting of such possibilities.

* Leasing or franchising station space to Independently ownedrestaurants, other commerclal shops, and government postaland telecommunications agencies, as well as other forms ofcommerclal development of railway-owned real estate.

* Parcel service on freight or passenger trains.

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* Repair of non-rail equipment In railway maintenance facilities.* Manufacturing products for sale to non-rail customers In

railway manufacturing facilities.* Value-added logistics services for shippers, e.g., warehousing,

Inventory control, sub-assembly and packaging, freightforwarding, freight consolidation, and Intermodal arrange-ments.

* Intermodal services In collaboration with truck, bus, airline,and water carrier companies, and shipper associations andtravel agencies.

Conversely, the Plan should consider the economic wisdom of con-tracting-out certaln railway activities such as rolilng stock main-tenance, parcel service, terminal operation, and provision of specializedequipment (e.g., containers) to other companies. If private commercialInterests can provide these services at less cost and similar or betterquality than the railway, It makes sense for the rallway to divest them.

In working toward the objective of obtaining revenues sufficient tocover costs, debt service and retirement, and Investment needs, therailway enterprise must be relentless In creating value from all Itsassets. For example, railways the world over have often generatedsubstantial earnings from the sale, lease, or development of surplus realestate, especially In metropolitan areas. The railway must also evaluatethe potential of actively persuading new production facilities and otherbusiness operations to locate facilitles on Its real estate which couldgenerate profitable traffic for the railway. As well, operation ofhotels, bus lines, and cartage companies may be sources of Income (or,depending on the circumstances, sources of net cash drain from which therailway should withdraw). The Strategic Plan should review these"markets" and the railway's relationship to them.

Pose the Crucial Policy Options

Given agreement that commercially-oriented operation of the railwayIs the objective, and with the desired railway services tentativelyIdentifled, the Strategic Plan must next Identify those aspects of thenational transport policy which apply to the railway, and lay out thecrucial policy Issues which have to be resolved If the objective Is to bemet. This process will have an Impact on both the objective and theservices, probably re-shaping both to some extent, but lead to a muchclearer and more realistic understanding of the duties and obligationswhich each party -- Government and railway -- ultimately must assume.

Each country will have some policy Issues unique to It, but virtuallyall will confront the following:

Cost Recove.-y from Users. To operate on a commercial basis, therailway must charge Its customers rates that cover the operating andcapital costs of the services they demand. The strategic planning effortmust Include a careful assessment of the degree of cost recovery whichIs anticipated In total, and for each of the market/service segments

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identif led previously. If there Is little or no demand for a service andadequate rates cannot be charged, the service should be dropped by therailway. On the other hand, If governments (national, provincial, or local)are prepared to cover the shortfall between revenues and the operat-Ing and capital costs for a service, the railway should willingly providethe service: In such situations government would simply become anotherpaying customer. In brief, tha railway should be Indifferent to thesources of the revenue provided that costs are recovered. Both railwayand Government must accept the principle of cost recovery. Without Iteconomically efficient operation and effective management cannot beachieved.

It deserves emphasis that the question Is not whether costrecovery will be achieved: cost recovery, through some combination ofrevenues, subsidies, borrowings, or capital erosion Is unavoldable. TheImportant principle Is that the revenues and/or government support foreach service should be equated with costs. This Is the only way thatrational choices, and plans, can be made.

Pricing Policies. Many approaches to pricing exist and they arelIkely to differ by major line of business. The SP should developagreement on the pricing principles to be used In each market segmentse.g., fully commercial, "value of service" (often called "Ramsey ) pricingfor freight and selected Intercity passenger services, "marginal cost"pricing for commuters and other Intercity passenger services, and com-petitively-based profit maximization for commercial services such asleasing space In stations to private businesses. It Is crucial that therailw-y be gIveni substintial freedom to negotiate contract rates withIts freight customers, and to raise and lower rates In response tocompetition, In market/service segments that the Government will notdirectly subsidize. This freedom may be subject to regulatory protectionagainst the extremes of below cost predatory pricing (I.e rates belowmarginal cost) and the undue exercise of pure monopoly power vis-a-vlscaptive users of the service (i.e. rates which are sufficlently far abovemarginal cost so that an Individual customer or class of customers Isbeing asked to make an undue contributlon to the coverage of fixedcosts). Quite simply, where competition exists, railways must be free tocompete. The economic logic of "full cost recovery" plus "pricing flexibi-lity" will undoubtedly result In the conclusion In the Strategic Plan thatsome rail services should not survive, or should not survive In all loca-tions. Where government authorities choose to support an otherwiseuneconomic railway service, they will be responsible for pricing theservice. The Strategic Plan should contain a clear definitlon of thepricing policies that the Government will apply to the non-commercialservices that It authorizes.

The question of monopoly pricing Is an Issue which, while It can notbe resolved In this paper, requires discussion. The railway Is quitelikely to carry certain nationally Important commodities under conditlonswhich do not permit adequate competition. If so, there Is legitimateconcern that the railway be prevented from "abusing" Its monopolypositlon -- and this concern usually manifests Itself In a desire for

5

various degrees of government Intervention In rate setting. There aretwo countervailing considerations: first, government Interventionundermines the essential objective that the railway be free to pursueIts commercial Interests, and be accountable for doing so; and, second,that the government, as the owner of the railway, Is the directbenefcilary of Improved fInancial performance by the railway, so long asthe rallway does not set Its rates so high as to unduly restrict theflow of the commodity In question.

There Is no easy solution to this challenge. One approach would be,as has been the case In the US and Canada, to restrict rate regulatoryIntervention to only those cases In which there Is no effectivecompetition, the railway Is clearly charging rates far above Its variablecosts, and the proposed rates slgnificantly restrict traffic movement.Under these cases, some upper limitation could be placed on rates.Alternatively, the traffic could be declared "social" traffic (much likesuburban passenger traffic, for example) where the railway could becomeIn effect a contractor to the government and would haul the trafficunder contracted terms and conditions. These, or other, solutions shouldbe Identifled and discussed In the course of the preparation of the Sr.

Social Service Commitments. Railways all over the world have beenused, explicitly or Impilcitly, as Instruments of social policy.Integrating the country, opening up remote areas to settlement,encouraging economic development or foreign Investment, Incomeredistributio3n and political pacification through low (or no) fares for railpassengers, and various labor-related objectives (discussed below), area few among many reasons cited historically by governments for requiringtheir railways to provide below cost service. A commercially orientedenterprise cannot survive such policies, because of both Incessantfinancial drain and the Irrational management objectives which theyentail. Consequently, the Strategic Plan must specifically Identify thoseuneconomic services that are to be continued, defIne the levels ofrequired support, and Identify the public authorities responsible forproviding the funds. Here It Is Important to clarify the scope of anylocal services, e.g., commuter operations, which a provincial or municipal(or even private) party would be willilng to support, though the nationalgovernment may not. Removing such services from the budget of thenational government -- a form of "denationalization" -- would placeresponsibility for supporting the service squarely on the users and localauthorities that benefit from It most, and thus are best able to decidewhat the service Is worth.

In addition, any extant policies for providing preferential rates forthe freight and passenger travel of national government ministries,departments, and public corporations must be examined and annulled(unless the Government or the agency Involved wishes to pay for them).Government organizations should pay for whatever railway services theyuse; otherwise, their budgets are recelving hidden subsidies and efficlentresource allocation Is diminished. Furthermore, It Is essentlal that theGovernment pay Its financial commitments to the rallway on time --whether for freight and passenger services used by government agencies,

6

social service subsidies, or capital subventions -- because late payment(or non-payment) forces the railway to borrow funds at high short-termInterest rates, thus deepening Its debt position.

The unavoidable truth Is that for a railway service which does notcover Its costs, either the Government subsidizes the shortfall or theservice must be discontinued. The SP provides the focal point forresolving these difficult Issues, Including careful definition of termssuch as "deficit," "subsidy," and "compensation" that Is acceptable to bothparties.

Labor Adjustments. In transforming the raliway Into a commercialenterprise, the work force will be affected significantly. Experience Inmany countries has shown that fair and equitable treatment of adverseeffects on labor Is absolutely crucial to successful completlon of arailway restructuring effort. Government must deal with this Issuedirectly, cushloning the Impacts In light of the political and economicconditlons which prevail. Redundant rail labor must be dismissed,transferred, or retrained for work elsewhere In the economy, and theunderlying causes of the redundancy (restrictive practices andgovernment employment policies, among others) corrected. Transferraland/or retralning and other job placement assistance Is best managed asa government responsibillty. Attritlon, early retirement, and jobseverance payments may all have a role to play. Government must decideand then provide the necessary programs and funding. Government mayalso need to assume the burden of any unfunded pension liabilities forrailway workers. If the Issue of labor redundancy Is not resolvedpromptly, however, rail costs will .- emain too high, efficient managementwill be thwarted, and the railway's commercial objective will not beachieved.

If railway employees are members of the natlonal Civil Service,serious consideration should be given to removing from the Service thosewho remain with the railway after the restructuring. Railways cannotcompete successfully with private sector companies that are free of ClvilService restrictions. The Civil Service hiring regulations, rigid jobclassifications and work rules, and tightly circumscribed promotionpolicies, job protection provisions, and (often inadequate) pay scalescollectively tle the hands of a commercially-orlented management whichneeds new people with new skills and maximum flexibility to redefine taskassignments, to reward the most efficient employees with Increased payand responsibilities, to adjust pay commensurate with prevailing labormarket conditions, and to reassign or terminate those who cannot performadequately. Just as civil service regulations stifle productivity In acommercIal setting, so too will restrictive labor union agreements. Hereagain Government assistance may be needed to overcome obstacles thatwould undermine meaningful reform If left unchanged.

Relevant External Factors

The Strategic Plan must Identify and evaluate any exteenal factorslikely to Impinge on the railway's performance. It should be rememberedthat railways, and all other transport modes, play a supporting role In

7

the economy. Their activity Is derived entirely from the activity ofother Industries and businesses that have need for railway service.Railways, therefore, are very much creatures of their economicenvironment. Indeed, part of the legacy of deep financial distress onraliways today Is a product of the old mythology that they (and highwaysand other transport Infrastructure) can, In anl of themselves, vlrtuallycreate benef:clal economic activity. Strategic planners must be veryattentive to external factors which are capable of conditioning thedemand for rali service and make their decisions accordingly.

Economic Forecasts and Policies. Key government macroeconomicpo:Icles and forecasts -- e.g., for GDP and Interest rates, or morespecifically, for new trade and agricultural policies which move thecountry from belng a net importer of a product to being a self-provider,or vice versa -- can provide Important clues. Estimates of growth Insignificant rail commodities may provide grounds for optimism aboutgrowth In traffic. However, caution Is needed In Interpreting suchforecasts. Fir%.t, old "rules of thumb" for gauging the Impact on railwayactivity of Increases In commodity output may not apply any longer. Theobjective of the restructur-d railway Is not to carry as many tons orwagon-loads as possible or to earn as much gross revenue as possible.On the contrary, the aim Is to attract traffic that makes a contributionto Income above costs. Thus Increasing the tonnage of money-losingtraffic Is not In the Interest of the railway. Second, estimates of astrong rate of growth In the economy may result In little or no changeIn demand for rall service If the growth Is most likely to occur InIndustries (or In service sectors) already heavily reliant on lorrytransport. In this situation, the railway must carefully assess Itschances, If any, of diverting such traffic from the highway mode. Third,"rosy" (colored with undue optimism) macroeconomic forecasts that arepermitted to become the basis for substantial Investment 'n rail plantand equlpment can be extremely costly to the railway and cripple Itseffort to restructure. Consequently, considerable realism Is needed Indetermining the Implications of macroeconomic forecasts for theoperations of the railway.

Similarly, forecasts of Increased consumer disposable Income may beof little practical value to a railway If It Is prlmarily a carrier of bulkcommodities and Is gradually withdrawing from unprofitable passengeroperations. Government export promotion plans could be of specialsignificance In Increasing the demand for rail freight service, againdepending upon the nature of the products Involved ard the competitivestrength of trucking and perhaps air freight. The Government should alsoIdentify any plans It may have for large scale populatlon relocation orremote area development, and the extent to which It expects the railwaysystem to be Involved and on what terms. The railway must not beexpected to subsidize such activities, but It must adjust accordingly.

Policy Toward the Competing Modes of Transport. The Government'spolicies vis-a-vis the highway, Inland waterway, and aviation modes mustbe examined In the Strategic Plan. Properly, there should be a levelplaying field for all competing modes. If there Is not, and one or

8

another benefits excessively from direct or Indirect subsidies, even thebest attempts at railway reform can be a losing proposition. Just asthe reformed railway Is expected to cover Its full costs, so must theother modes. In many countries, motor carriers are believed not to paya fair share of the costs of the hlghway systems they use or of theenvironmental costs they generate, and to benefit from lax (or non-existent) standards relating to vehicle registration, axle-loading, safety,and financial fitness. These advantages benefit highway trans-porta-tion and disadvantage the railway. Furthermore, government bucgets mustbear the costs of any such privileges permitted by uncoordinated andInconsistent modal promotional, subsidy, loan, grant, and tax policies.

Planners must approach the level playing fleld question with cautionand finesse. For example, the deficiencies In the railway today which area legacy of Its past, and the practical fact that It may take a periodof time before It Is properly prepared to compete commercially on eventerms with Its unregulated competitors, may warrant some privilegedtreatment for It Initially from the Government. Looking to the future,however, It must be established that the rallway also Is expected tostand on Its own, without undue support, vis-a-vis the other modes.

Apart from the Issue bf unequal treatment among modes, thestrategic planners must consider any Government plans for expansion orImprovement of highway and secondary road systems. If such plans exist,a realistic assessment of their effects -- largely In terms of freight(and perhaps passenger) diversion -- on the railway will be In order. Ofcourse highway and road expansion may also serve as a reassuringpalliative In areas where curtailment of uneconomic services or closureof uneconomic rail branch lines Is necessary.

Although not a government policy Issue, It Is also prudent for thosepreparing the SP to assess candidly the strength and viability of therailway's competitors. After making allowance for any subsidies they maybe recelving, how efficient are the other modes and the fIrms whichoperate In them? What are their cost structures? How committed areshippers and travelers to using lorries, water transport, aircraft,buses, and other private means of transportation? What Is the range ofcompetitive countermeasures which the railway's competitors are likely to

I take In reaction to the restructured railway's new market Initlatives?(Competitive markets, by nature, are dynamic rather than static.Continuous change becomes commonplace. The railway's commerciallyoperated competitors are far more experienced In operating In thisenvironment.) On a level playing field, to what extent are they likely tosustain an advantage over rail In various market/service sectors? Anenterprise operated on commercial principles must "listen to the market."It Is foolish to persist In offerlng services which the market no longerwants, or prefers to obtaln from another mode. It makes sense to servethose markets where demand exists, assuming competitive prices andacceptable quallty of service. Accurate knowledge of the capabilities ofone's competitors will make It more likely that realistic Judgments aboutthe attractiveness of potentlai rail market/service niches will beforthcoming from the strategic analysis.

9

It Is also vitally Important that the planners assess the degree towhich the demand for transport Is distorted. If, for example, most of thefreight shippers or receivers are government agencies, and If theseagencies experience no effective pressure to minimize their cost oftransport, then the market will not respond as expected to acommerclally oriented railway. In many countries, correcting distortionson the demand side can play an Important role In the process ofrestructuring the rallway's Interactlon with Its markets.

Special Economic Administrative Constraints. Many existing generalGovernment restrictlons on economic and financial activity can constrainthe effectiveness of a railroad that Is being restructured to operate oncommercial principles. The Strategic Plan must Identify all suchdiscriminatory restrictions that are relevant to the railway. Eltherwalvers (full or partial) will have to be granted to the railway andothers so situated, or the Impacts of the restrictlons on the railwaymust be calculated and the enterprises's objectives and performanceexpectatlons scaled back accordingly. The types of restriction at IssueInclude, but are not limited to, the following: availability of foreign ex-change (especially as It relates to the railway's ability to acquire spareparts), Import controls, permissible sources of foreign and domesticborrowing, ratloning, wage controls, and Irocurement regulations requiring"local only" and/or "low bid" purchases.

Other Relevant Factors. Each country should Identify any otherexternal factors of relevance to Its railway and ensure that they arecarefully considered In the development of the SP. For example, railwaysdependent on connections with foreign railway systems for Importantvolumes of traffic must evaluate realistically the likely futureperformance of their Interchange partners, recognizing that the futurecourse of International relations Is not easy to predict. Is the foreignsystem reliable? Can It handle the Increased traffic and/or meet theservice quality standards envisioned by the restructured enterprise?How crucial are the routing policies of foreign railways and thelrgovernments and are they subject to unilateral change? Are therecapacity constraints on the foreign railway or at a port which It servesand through which our traffic must flow? Are the revenue divisionsbetween the two systems equitable? Can they be renegotiated? Theanswers to such questions can significantly condItlon the performanceexpectations of the restructuring rallway and must not be Ignored.

One planning factor pertinent to all railways Is the assumption madeabout technological change. Are major changes In technology anticipatedthat will significantly alter the efficlency or quality of rail servicevls-a-vis competing modes of transport? Are other modes likely tobenefit from such changes to the net disadvantage of rail? Will newtechnologies put a premium on the development of new cooperativerelationships between modes and new joint services? Above all, It Isunwise to assume continual advance In rail technology and little or noprogress In other modal technologies.

10

The rapid globalization of domestic economies Is spawning achallenging new set of logistics problems. Varlous concepts of totalcost, Integrated logistics management have been developed to deal withthem. 1 0 Freight shippers, In particular, are demanding more services andgreater efficlencies In the performance of the logistics chains In whichthey participate. Both the restructured railway and Its competitors arelikely to be affected by this thinking, sooner or, later. Whether thisdevelopment will result In business opportunities for the railway, ordisadvantage It significantly, Is a matter for prudent consideration.

Assess the Strengths and Weaknesses of the Railway

Typically, In the strategic planning processes within major privatecorporatlons, evaluation of essential external factors Is balanced by aclear-eyed assessment of the Internal strengths and weaknesses of thecorporation Itself. This same step makes sense In the Strategic Plan.Almost by definition, many of the railways being converted to commercialenterprlses are not In top-flight condition. They carry the scars of thedeficiencies which the restructuring effort Is Intended to correct. Withthis sort of legacy, they need to be strengthened to the point wherethey may fairly test their ability to succeed as commercial entitles.Government assistance may be necessary for this purpose. Beyond theImmediate Issue of the railway's current capabilities, the Strategic Planmust also consider future opportunitles for the enterprise to exploit andfuture vulnerabilitles which It must prepare to avert.11 Indeed, "Et3hereIs an enormous payoff to the skilled probing of opportunitles and threatsIn a company's future and relating t2hem In an unbiased study of thecompany's strengths and weaknesses." 1 2

Several of the elements which help to determine a rallway's profilehave been noted above, e.g., excessive levels of debt, redundantpersonnel, too much physical plant, and operating and other costs thatexceed revenues. However, other factors should be Identified during thestrategic planning effort which make the status of the railroad ab-solutely clear. For Instance, the age, number, and avallabilly oflocomotives and ot;her equipment; the extent of deferred maintenance ofway and the general operating condition of rail plant; the availability ofsuitable computer systems; and the quallfications of personnel at alllevels of the organization, In light of the requirement that they operatea commercial enterprise.

With this Informatlon "on the table," decisions must be made In theSP about the need for special steps to remedy the critical deficiencies.Some may require significant capital Investment (discussed below). Otherchanges, no less significant, are likely to be primarily Institutional Innature. A major Issue will be the availability of people, from topmanagement on down, who can function effectively In a competitivecommercial environment. While the detalls of Internal reorganization arebest left to the railway's Management Plan, analysis and discussion atthe SP stage Is necessary to ascertain whether Government assistanceIs required (and to reassure Government that the restructured railwaycan function and succeed as a business entity). Marketing, pricing, sales,

11

and customer service skills will be urgently needed on the restructuredrallway. People prepared and wliIlng to act and react quickly and flexiblyto meet changing market demand conditions are essential. If they cannotor will not, business will be lost to the competition, perhaps Irrevocably.Can such people be hired In-country, from other commercIal enterprises;can existing railway staff be tralned and, If so, what types of trainingare required; are consultants necessary, both to serve as expert stafffor an Interim period, as well as to train; can speclal arrangements bemade with local universities to prepare students for careers Inmarketing, sales, and customer service? If the latter option is selected,the railway must be prepared to pay competitive salarles lest otherbusinesses bid these graduates away. This provides an example of thecritical need for freedom for the rallway to hire and fire and to trainand develop Its personnel without regard to Clvil Service regulations.

Similarly, most state-owned raliways that become commercialenterprises will need a significant up-grading In the ability to measurethe cost of their services. Accurate knowledge of costs Is the key toIdentification of traffic and services which can earn a profit (orcontribution to net Income) above costs. The objective of therestruc-.ured railway Is to maximize such desirable traffic and serviceswhile ellminating those which cannot pass this test. As with themarketing and sales skills noted above, special efforts may be needed toput people with these skills (and relevant computer support) In place asqulckly as possible.

The Internal cultural revolution required on a railway that acceptsthe challenge of operating as a commercial enterprlse also extends Intothe operating and engineering departments. The difficulty Involved Inachieving the necessary changes In operating and engineering skills andattitudes should not be underestimated. Most railways have been"production led;" that Is, the customer Is expected to adapt to whateverservices the railway chooses to supply, rather than the reverse. Acommercially oriented or umarket ledu railway, on the other hand, focuseson the customer's demand for services and develops the optimum resultingcombination of price and cost needed to meet the customer'stransportatlon requirements (even If this Implies that costs are notminimized).3

Unfortunately, the best marketing theories and most Innovativesales packages that can be devised have no meaning If the quality of therall operations actually performed Is faulty. Quallty In operationsdepends on having railway operational personnel who are as sensitive tocosts and to the needs of the shipper or traveler as Is the marketingspecialist. In the phraseology of British Rail:

Our Quality strategy Is not about meeting general targets forservice punctuality and equipment availability agreedInternally between the Business and Production functions. ItIs about meeting, time after time, the Individual specificationagreed with the Individual customer. 1 4

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Trains that are late, use the wrong equipment, lose or mis-route wagons,or tolerate lengthy terminal delays will destroy the best-laid plans withshippers, drive the business away to lorries, Inflate costs, andcontribute to the rapid demise of the enterprise. Rallways which do notoffer the services that customers want, will soon have no customers, orat least too few to Justify continued operation of the railway on acommercial basis.

The Strategic Plan must conclude that the sort of tcp managementleadership needed to Infuse all levels of the railway wlth the newentrepreneurial spirit, and to focus them all In Integrated fashion on asingle-minded, shared commercial objective, Is available or Identify a wayto find them. Special Incentives may be needed to attract and retainsuch people.

Develop An Enterprise Forecast

The SP should Include a multi-year (between three and ten years)pro forma forecast of the Income statement, balance sheet, and fundsflow statement for the restructured enterprise. This forecast Is notIntended to serve as a management plan. Rather Its purpose Is toprovide an overview of the results likely to flow from the mix ofdecisions, assumptions, and policy options developed earlier In the SP.Various "mixes," of course, are possible, and their respective forecastswill provide the strategic planners with clearer understandings of theconsequences of their choices In quant.itative terms, e.g., from changesIn labor force levels, major line abandonments, or Introduction ofentirely new services, and help to reshape their choices. The forecastscan also be used to explaln the restructuring effort to the public andall other Interested parties, and they can Illustrate the budgetImplications of Government decisions to support particular uneconomicservices.

Prepare a Capital Plan

The capital plan Is a statement of the capital resources requiredto carry out the levels of activity foreseen In the enterprise forecast.It should address each line of business, by year and by major Item ofInvestment, as well as any special expenditures undertaken to give therailway an Immediate boost In capability. A discussion of thejustification for each Investment should be Included, as well as anIndicatlon of the source of the capital, .e., Government, railway, or somecombInation of the two. If It Is decided that the railway will not beexpected, at least initlally, to finance all of Its capital requirementsfrom customer revenues, then some Government capital subvention will benecessary. The cost of any new borrowing by the railway should bereflected In the pro forma Income statement.

Review the Safety and Environmental Aspects of the RailwayGiven that economic deregulation of the railway's activities Is

essential to Its successful operation on commercial principles, It doesnot follow that safety and environmental regulation should necessarily

13

be relaxed In the same degree, or at all. Safety and environmentalprotection are significant public values. If anything, they should beconstantly Improved and strengthened, and regulation may be necessaryfor this purpose. There Is, however, one Important caveat to thisproposition; namely, that safety/environmental regulatlon should not bepermitted to mask or disguise other kinds of Interventions, such asrestrictive labor practices Imposed In the guise of "safety," thateffectively constrain the raliroad's abillty to functlon as a well-managed commercial entIty.

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PLAN 2

THE CONTRACT PLAN

When the strategic planning effort begins to converge on agenerally accepted approach, the development of the Contract Plan (CPJshould begin. The Contract Plan, as the word "contract" denotes, Is aformal ratification by the railway and the Covernment of their respectiveobligations. Strictly speaking, It Is nolt a "plan" but rather anImplementing or "agreed actions" document. It states their mutualacceptance of the entrepreneurial mission and objectives developed Inthe Strategic Plan, clarifies the authority and responsibillty of therailway, stipulates the performance levels expected of the railway,specifles the commitments undertaken by the Government, and establishesa time period for the duration of the contract (probably three to fiveyears).

Contract Plans have been used In a number of countries since the1970's. For the most part, It Is generally conceded that these planshave fallen short of expectations, apart from Improving the quality ofcommunications between government and railway. This record Is due to anumber of causes, Including failure to deal well (or at all) with strategicIssues, undue government Involvement In detailed Internal managementmatters best left to the Management Plan, failure to relieve the railwayof restrictions on Its ability to make decisions or a failure of the rail-way to respond effectively to the opportunities created by such newfreedom as was offered by the CP, and the Inability of governments tokeep the commitments that they had made In the CP.16 The authorsbelieve that development of a Strategic Plan, along the lines suggestedearlier In this report, will greatly Improve the likelihood that a conciseand effective Contract Plan can be negotiated by the parties.

A workable CP should meet three tests. Flrst, Its terms must beclear, complete, and mutually consistent. Ambiguity, Incompleteness, orcontradictory terms which serve to conceal problems or postponeconfronting difficult Issues must be avoided. Second, both parties musthave the authority, capability, and willingrness to carry out theircommitments. Otherwise, the CP has no meaning. Commitments that cannotbe kept are best not made. Third, the CP must not be an unduly rigiddocument. It should Include provision for making mutually agreed uponadjustments In the light of experience. This Is In recognition of thefact that both the Government and the railway are setting out onrelatively uncharted waters, namely, to operate a major enterprise onthe basis of commercial principles for the first time. The two partlesshould assune that some of the Initial assumptions used In the SP willprove to be too optimistic or too conservative, anI that there will beunexpected (perhaps unpleasant) developments as the enterprise tests Itsmettle In a commercial environment. Thelr responsibility when suchoccasions arise Is to work together to plot the necessary correctionsIn course, exploring the available options In the same spirit as was doneIn fashioning the Strategic Plan.

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If these three tests cannot be met, there Is no point Inslgning a Contract Plan.

Affirm the Mission Statent and ObJectives

The CP will adopt the mission statement for the railway enterprisedeveloped In the Strategic Plan. That Is, to provide efficient transportby replicating the behavior of a commercial, profit-oriented enterprlseoperating under conditlons of adequate competition. In effect, thismission provides the Incentive for the rallway to provide Its servicesIn the most efficient way.

The Government and the railway also jointly adopt the definitlon ofthe objective or objectives which the railway Is to achleve, as presentedIn the SP. One piruslble definition Is to recover from revenues funds Inan amount sufficient to pay the costs of providing the service, meetInterest and principal payments or debt, and contribute to (or cover Infull) new Investment In the ralilway. The parties may wish to set atarget percentage return on 1 ssets for the Railway or provide otherrefinements to the definitlon. In some situations It may be desirableto phase In achievement of the objective over time, In effect recogniz-Ing a transition period before full commercial operation Is attained. Ifthis approach Is used, the Interim targets should be spelled out In theCP. Note that while the railway's primary objective typically Isexpressed In financial terms, It necessarily subsumes achievement by theorganization of critical subordinate goals such as motivating the workforce, developing marketable services, and building customer satisfac-tion. (These are matters best dealt with In the Management Plan.)

Most CP's will also assign the railway the objective of providingcertain services specified and supported by the Government, asefficlently as possible. The Government may wish t establish a seriesof goals for phasing down the size of Its subsidies1 or for phasing outparticular services, 19 over time. These targets would be stated In theCP.

Delineate the Railway's Authowity

The CP must enumerate the areas In which the Railway will have theauthority to make decisions, as distinguished from those whereGovernment review or approval will continue to be necessary. It Is asound general principle of effective administration that responsibilltyand authority be located at the same place. This principle Is absolutelycrucial to the successful operatlon of a competitive, profit-makingenterprise. It must have the authority to make the decisions whichcontrol fulfillment of Its responsibilities. Obviously the railway must beheld accountable ex post for any public funds It uses, but It must befreed to the maximum extent possible of the need for ex anteconsultation with Government about Its activities, just as would be the

16

case for a private sector enterprise which viewed the Government as acustomer, and not as an owner.

Among the types of railway authority likely to be listed anddescrlbed In the CP are the following:

(1) Freedom to set and change prices on Its commercial (non-supported) freight and passenger services, to negotiateconfidential contract rates with freight customers, and tomarket services as It sees fit.

(2) Freedom to hire, fire, train, classify, pay, assign, promote,and organize Its labor force.

(3) Freedom to borrow funds.(4) Freedom to engage In commercial ancillary services with its

assets.(5) Freedom to enter Into contractual arrangements wlth private

sector companies to obtain services that It needs, artd tooffer new Joint and cooperative logistics services to cus-tomers,

(6) Freedom to alter the physlcal size of the railway system andthe size and consist of Its fleet of locomotives and otherequipment.

(7) Freedom to cease railway services that do not meet commercialobjectives, and for which Government does not choose toprovice financial support.

Establish the Railway's Performance Standards

For unsupported rail services, the only standard needed Is thepreviously set objective of the enterprise. Either It acnieves anadequate return on Investment (or some other measure of profitability),or It does not. To achieve this objective, by definition It must operateefficiently, Invest capital wisely, provide quality service, and market andprice aggressively. Such traditional measures as volume or ridership"commitments," number of on-time departures and arrivals, etc. areunnecessary In the CP, though they may appear In the Internal ManagementPlan. Baslcally, they are variables which are under the discretion andcontrol of the management of the commercially operated railway. Indeed,as noted In the Strategic Plan, a goal to achleve a fixed Increase Intonnage, wagonloads, or gross revenue would be self-defeating for theenterprise If the only way to obtain It was to carry the traffic at arate below the costs of providing the service. The simplicity and clarityof the goal "to earn a profit" (or positive net Income) Is one of Itsmajor attractions. Success or failure Is very easy to see.

The Government and the railway should agree on a separateperformance measure for those unprofitable rail services which theGovernment chooses to support for reasons of political and social policyor because a transition period Is needed before they can become self-sustaining. The demand forecasting, service quallty levels, and pricingof such services becomes the responsibility of the Government, and therailway simply serves as a contractor to the Government for the

17

provision of the services. Its obligation as a contractor Is to operateas efficiently as possible.

The two parties must negotiate the terms of the contract, coveringthe fares/rates (and hence revenue) which the Government will permit, theRallway's estimated cost of providing the service (greater than revenue),and the differential between revenue and cost which the Government Isobilgated to pay. Of course, the Government could reduce the size of thedifferential on passenger service deficits by ellminating the "free pass"and narrowing the range of riders eligible for fare discounts and thesize of the discount. For Its part, the railway could Improve theeffectiveness of fare collection to reduce the draln of lost revenuefrom fare evasion. The Government could also narrow the differential byoffering Incentives to the railway either to cut Its costs more or tocarry more passengers (or frelght) for the same cost. For example, theGovernment could authorize the railway to keep a percentage share ofany cost savings It achieved below a designated target level of costsfor the service, or of revenue galned from Improved fare collection. TheIssue of devising effective Incentives In a supported services situatlonIs complex. The Government wants costs minim;zed without degradation ofservice below agreed normative levels. The incentives should be devisedto encourage the railroad to reduce costs and Increase revenue (with-in the limits of the Government's pricing pollcy) without reducing thequality of service. Of course, allowing the raliway an opportunity toearn some profit on Its Government contract operatlons would serve asa stimulus to the railway to not neglect efficient management of thesupported services.

Critical to achieving the objectives of both unsupported andsupported services Is proper determination of their costs. Thereforethe CP should Indlcate the cost allocation methods which will be used todevelop "profit centers" for the commercial services and "cost centers"for the Government's supported services (to permit both proper audit andpublic justification). Both sides must understand that perfect alloca-tions of cost are not possible, In theory or In practice, because of themany joint and common costs Involved In railway operation. Experiencewill gradually provide a basis for adjusting and refining the allocations.It Is, after all, not essential that the allocations be perfect -- theyonly need to produce predictable results and proper Incentives. In themeanwhile, aGreement on one or another commonly accepted methodologywill suffice. ° In some cases, agreement will also be needed on aschedule for phasing-In the full application of the costing system. Atthe outset of the reform process, the railway will have actual costswhich are too high, but which cannot be reduced Immediately. Raisingrates overnight would elther lose traffic, or force rates to be too high:an appropriate phasing plan would permit costs to fall before rates areIncreased. For the Government's supported traffic, the CP shouldIndicate the extent to which the railway will be held responsible for Itsinitlal cost proJections and settle on the techniques to be used foradjusting costs for any variances In the projected volume of socialtraffic. These techniques no doubt will have to be adjusted periodicallyto take account of actual experience. Properly, "costs" for supported

18

services will cover the fully allocated operating and capital costs ofthese services. It should also be decided whether an allowance forprofit will be Included.

Rallway Commitments

In return for Its broader and clearer authority, and In the light ofIts performance standards, the railway must undertake certaincolmnitments. These would Include, among others:

(1) Aggressive and professional efforts to melt the performancestandards, such as the financial targets or agreed quality ofservice standards on supported services.

(2) Effective management of operations, such as efficient labor forcesize and working conditions, professionally managed procurements,and efficient acqulsitlon and use of capital resources, howeverderived.

(3) Mutually advantageous relationship with customers, I.e. qualityservices at competitive rates for commerclal customers, and fullysatisfactory deHvery of services to contract customers (includingthe government, where supported services are provided).

(4) Monopoly positions, If any, will not be abused.(5) Forthright and transparent relationship with the government,

Including accurate financial and operatlonal Information asnecessary to verify performance against standards or targets, goodfaith projections of costs and revenues for supported services, andaccurate estimates of capital requirements.

(6) Fair and responsible relationship with the labor force, Includingpay, conditions of work, and Incentives (both for labor andmanagement).

Government Commitments

As the relationship between the Government and the railwaychanges, the Government will have certain obligations to fulfill which willbe critical to achievement of the goals of the Strategic Plan. Some ofthese actions may require legislation, budget allocations, cancellation,amendment, or waiver of regulations, Issuance of directives togovernment departments, promulgation of new policy statements, orreorganization of government departments. The Government's commitmentscould very well Include some or all of the following:

(1) Deregulation of rates and fares, service levels, and decisionsto abandon rail plant and services that are not supported bygovernment.

(2) Changes In rail safety regulation.(3) Changes In government policy toward non-rail modes of

transportatlon In terms of economic regulation, taxation,promotlon, safety, etc.

(4) Assumption of past railway debt obligations.(5) Capital Investment payments In the railway (amount and

schedule).

19

(6) Payment of operating subsidies for supported services (amountand schedule).

(7) Removal of railway personnel from Clvil Service Jurlsdiction,and assumption of unfunded Civil Service pension liabilitIes.

(8) Funding and other arrangements for a program to reduce therail labor force, Including transfer, reemployment assistance,retraining, severance payment provisions, etc.

(9) Definition of procedures for assuring timely payment bygovernment ministries for charg-s owed to the railway.

(10) Cancelling, waiving, or modifying certain general regulations,e.g., on foreign exchange availability, Imports, procurement,borrowing.

(11) Formal authorization for the railway to obtain goods andservices from private contractors, to enter Into cooperativearrangements with third party transportation companies andlogistics services providers, and to use Its assets freely forcommercial purposes (leasing space, selling or developing Itsreal estate, etc.).

Finally, the Government must commit to prompt preparation andImplementation of the Enabilng Actions Plan (discussed below) which willclear the way for a rapid start-up of the railway's operation as a trulycommercial enterprise. The Government should also designate -- andendow wlth the appropriate authority -- a single department, agency, orInterministerial group to serve as Its principal spokesman and point ofcontact with the railway. The railway must be protected against theneed to deal with multiple government offices, each claiming to speak onbehalf of or as "the" Government. There should be a single authoritativeGovernment voice for railway matters, one capable of resolving anydifferences within the Government as well as requirlng governmentagencies to meet their respective obligations vis-a-vis the railway.This authority could also be charged with making the factual findingsassociated with tariff protests or line abandonments.

For example, Kenya has recently taken the Innovative step ofestablishing a Railway Monitoring Group (RMG) to oversee the performanceof both the railway and the Government In fulfilling their respectiveobligations under the terms of the Memorandum of Understanding signedby both parties. A similar group Is envisioned In Nigeria. Givenadequate authority and resources to do their Job, Independent agenciesof this type can play very constructive roles In promoting a successfuloutcome from the railway restructuring process.

20

The Board of Directors

In line with the unification of the railway/government relationshipIs the need to assess the structure of the Board of Directors, orManaging Board. Many railways have traditionally functioned under Boardswhich are either wholly staffed by railway personnel (which tends toreduce the railway's responsiveness to external forces, and oftenundermines the authority of the chief executive) or which, howeverstaffed, have very limited authority (some boards, for example, focusentirely on procurement Issues, and have no policy authority). Neithersituation Is conducive to proper management of a market-orientedenterprise. It Is likely that a new Board, Including authoritative outsideappointments and with a broader role In policy decisions, may need to beInstituted.

Contingency Provisions

The CP should Include a section which Identifies the procedures tobe used In the event of a major failure, either In meeting the terms ofthe document or due to some external event which renders It moot.

For Instance, what Is to be done If the Government falls to makesubsidy payments or a major capital Investment payment? In that event,can (or must) the Railway discontinue the affected service? How will theGovernment acquire the funds necessary to fulfill Its commitments?

Similarly, to what degree will the railway be required to takeresponsibility for the cost and profitability projections for the non-supported commerclal services? How long should large losses bepermitted to accrue? Will the Government make good those losses (or apart of them, at least for a limited period)? Should there be a loss"cut-off point beyond which the railway will not be permitted to go anda given commercial service suspended or terminated?

And what Is to be done to cope with significant change In theexternal environment? For example, the CP between the Frenchgovernment and SNCF conceivably could be made meaningless If theirmutual estimates of the Impact of the lntegrateJ European market ontransportation In France In the early 1990's were orders of magnitude Inerror. Any country faced with such events should move with great speedto reframe both the Strategic Plan and the Contract Plan.

21

PLAN 3

THE MANAGEMENT PLAN

The Management Plan (MP) Is an Internal document prepared by andfor the railway. In It the activity plans In the Strategic Plan and theperformance commitments In the Contract Plan are converted Into detailedoperational targets for each of the railway's departments

Normally the MP will have a three to five year planning horizon.The performance targets for the first year of operation as a commerclalenterprise will take account of the Inevitable start-up problems whichcan be expected as the railway transitions to Its new role. The "outyears" will also be revised each year to account for year to yearchanges (internal and external) and experience gained.

Establish the Organizational Framwork

It Is almost certain that on most railways the switch to acommercial mode of operatlon will warrant changes In the organizatlonalframework of the entity. The railway's "complex structures hamstrung bytradition are particularly In need of a face-lift to encoura etransparency, flexibillty and, above all, results-led thinking."Particular attention must be given to the marketing, sales, pricing,customer service, costing, and management Information systems functionswhich are so critical to the success of the restructured enterprlse.New departments and authorities may be necessary to Insure that thestatus of these functlons Is elevated to the highest level. While theactual form of these organizational units Is open to discussion, It seemsIncreasingly clear that some form of "business sector" organizationdeserves careful consideratlon. For example, this might take thesimplest form of freight versus passengers: It could be made moreelaborate as appropriate, as In British Rail's Freight, Intercitypassengers, Network South East, Provincial and Parcel's Organization.As another example, American railroads are tending to merge "marketingand sales" Into a single department oriented to major customers (oftencalled "national accounts"). This has the advantage that customers havea single point of contact to deal wlth Inside the railway; moreover, froma management point of view, administrative "turf" battles betweenseparate customer-oriented departments are avoided and employees arefurther Imbued with the Idea that they have a common purpose -- toserve the customer and earn profits for the railway. "Costing" Is oftenlocated In the finance department and sometimes In the systemsdepartment. Costing also warrants careful thought because It Is a func-tion that has long been Ignored In countries where rigid economicregulation of railways has predominated. It Is only when positive netIncome becomes the objective of the enterprise that the Importance ofknowing actual costs -- and controlling them -- becomes significant. Oneof the blggest challenges to the privately owned American railroads sincetheir relative deregulation In recent years has been to overcome decades

22

of neglect In the determination of costs and to delsgn effective profitmeasurement systems for use by railway management. For a competitiverailway, profitability Information must be accurate, specific, timely, andaccessible to Its users throughout the organization. The restructuringstate-owned railways will have to confront the same challenge and mustgive this function adequate status and support within their or-ganizations.

Finally, the administration and personnel departments on the railwayhave to be evaluated and, where necessary, reinforced, because of thecentral roles they must assume. Administration must focus on reducingoverhead costs throughout the organization. As the restructured railwaybegins Its new life, reductions In overhead are as Important as new salesbecause overhead costs directly reduce net Income. Assuming constantrevenue, for example, a $1000 reduction In overhead automaticallyIncreases profits by $1000. Of course, while the administratlondepartment attacks general overhead costs, all other departments mustshare In the effort to cut costs within the scope of their own respon-sibility and be given Incentive and assistance In dolng so.

The personnei department has the critical task of seeking tostrengthen the railIway's human resources so that It can performsuccessfully under competitive conditions. Its assignments areformidable: dispense wlth redundant labor, retrain some workers for newJobs within the railway, recruit new employees (often for new or newlyexpanded positions In areas such as marketing, customer service, costing,etc.), replace a Civil Service organizational culture with one geared tothe operation of a commercial enterprise, devise salary, development,promotion, performance Incentive, and employee benefits systems, etc.Personnel must work very closely with each of the other departmentheads and give them the utmost support as they strive to transform therailway Into an effective competitive enterprise.

Freedom from Civil Service restrictions also enables the railway tofocus comprehensively on Its work force costs, above all attuning themto the prevailing private sector labor market. This may result Inrestraining wage levels for some categories of worker, as well asIncreasing wages for others In short supply, I.e., differential pay whichrecognizes the differential value of work performed. It also providesflexibility for the use of Incentive wage programs which rewardproductivity and outstanding performance In meeting the railway'sprofitability objectives. These questions pertain to the entireorganization.

Determine the Ralilwy*s Pricing Policies

Drawing on the discussion of pricing In the Strategic Plan, theManagement Plan will reaffirm the pricing principles the railway will applyto the varlous markets/services that It Is authorized to serve on acommercial enterprise basis. As noted In the SP, It could choose toapply fully commercial pricing to freight and perhaps express Intercitypassenger service, marginal cost pricing to other Intercity passenger

23

services and commuters, and straightforward profit maximization to anyrali-related commercial lines of business that It undertakes.

The raliway will estimate the economic advisability of Increasing thevolume of Its freight moving under contract rates and on what terms.Likewise It should assess the extent to which promotional rates will beoffered to attract new (or previously lost) traffic to rail service. Thisrequires careful determination of the approprlate rate level, the amountof potentially profitable traffic likely to be attracted, whetherIncreased volume at the low promotional rate could reasonably beexpected to generate sufficient profit, and the point at which thepromotional rate could safely be raised (after demonstrating quality ofservice to the shipper) wlthout losing the traffic.

For the railway's "supported" non-commercial rail services theGovernment Is responsible for making the pricing decisions. The MP,however, should show clearly what the Government has decided and whatthe Implications of those pricing decisions are for operation of therailway.

Specify Responsibilities and Performance Goals

The MP will specify the responsibilities of each department and themanagers who direct them. Of crucial Importance, however, the generalmanager (or his equivalent) must Impress on the departments that In acommercial enterprise each of them has the same overall objective,namely, to achieve the target profit, contribution to net Income, or rateof return that was determined In the SP and ratifled In the CP. Thisgoal will not be met If departments seek elther to operate as Isolatedflefdoms or set their own p-Ivate standards of performance. That Is arecipe for failure. On the contrary, every effort must be made by thedepartments to cooperate actively In pursult of the common objective.Operating the trains on time will not mean much If the marketing demandsof shippers have been badly misjudged; likewise, brilliant marketinginitiatives can be wiped out by train operations that fall to deliver thequality of service expected by the shipper. The general manager andeach department head must devote constant attention to Insuringproductive and harmonious Interdepartmental relations, and, In part,should be evaluated on their success In doing so.

With that In mind, the MP will Include goals and performancemeasures such as the following for appropriate departments and sub-departments:

(1) Revenue targets, based on assessments of demand, expectedpricing behavior, and costs. The objective Is not grossrevenue per se, but revenue which makes a contribution to netIncome. The obvious corollary Is that traffic carried belowcost should elther receive a tariff Increase or be eliminatedaggressively. These targets are directly related to therailway's objectives for levels of profitability or return onInvestment for particular commerclal sectors/services.

24

(2) Forecasts of outputs, along with cost estimates at each levelof output.

(3) Cost reduction targets (or Increased output per unit of cost).(4) Basic performance Indices, e.g., percent of trains on time,

percent of locrotives avallable for service, percent loadedutilization of wagons, meeting current maintenance of way (MOW)schedules and reducing deferred MOW, percent of revenuecollected (where passenger fare fraud Is an Issue), and ef-ficiency measures for Government-supported services providedunder contract. Because of the railway's newness In operatinglike a commercial company, these targets should be open tocontinual review and revislon In the light of experience, butappropriate performance Indicators are a critical element ofsuccessful management.

(6) Other performance commitments, such as completion ofscheduled Investment programs within budget and on time,attaining various productivity targets, meeting staff reduc-tion, recruitment or training objectives, motivating the workforce, achieving greater value In the utilization of railwayassets (leasing station space, developing real estate, etc.),enlisting new customers, building customer satisfaction, devis-Ing marketable new service offerings, and any other keytargets for which a particular department Is responsible.

To be useful, In a practical sense, the Indices and otherperformance Indicators that are used must be readily measurable,understandable, and reportable. They should also be kept to a relativelysmall number, because the overriding aim of the railway Is to have allemployees busy selling and delivering the railway's services, not fillingout forms and re-creating the very bureaucratic Inertia which the reformeffort is meant to eradicate. If large number of employees are neededJust to fill out reports, then the wrong Indicators have been selected.Plck only those critical Indicators which the department manager needsto know to do his job properly, and which he must have available at hisfingertips. The ultimate criterion of course, Is simply to ask whethereach department, manager, and employee Is doing whatever It takes todeliver railway services to customers at price and quality levels thatwill keep the traffic on the railway (and hopefully attract new business)at a cost low enough to enable the enterprise to earn positive netIncome.

It Is Important to emphasize, also that the the performance goalsIn the MP are Internal commitments among the raliway Chief Executive andsenlor managers and should generally not be part of the SP or CP. Insome, limited cases, It may be desirable for the SP or CP to take noticeof certain goals, but only when they are essential to the validity ofthese documents. What Is to be avoided Is, for example, the situationwhere an essentially technical Index such as locomotive availabilitybecomes a handle for political debate and Intervention.

25

PLAN 4

THE ENABLING ACTIONS PLAN

The "N section of the Contract Plan provides a comprehensive listingof the obligations which the Government has agreed to fulfill. TheEnabling Actions Plan takes that list and develops the program ofspecific steps which must be taken to enable the Government to make goodon each of Its promises, and enable the railway to begin operating as atruly commercial enterprlse as soon as possible.

Necessary new legislation and amendment or repeal of existinglegislation must be Identifled and a plan for achieving the necessaryenactments established. In Francophone countries, the "Cahlers desCharges* -- the document which describes the full Juridical status of therallway -- would be modified appropriately.

Any new funding authority needed by Government would be sought andprovision made for allocations In the national budget.

With respect to regulations, a schedule would be arranged for theIssuance of needed new regulations, or the cancellation, amendment, orwaiver of old ones, as required to meet obligations agreed to by theGovernment In the CP. Similarly, any necessary policy or administrativedirectives would be drafted and Issued to the relevant governmentdepartments.

The Enabling Actions Plan would also arrange for the Impleme-ntation of agreed changes In the organization of government agencies andthe removal of the railway from the Civil Service. An action programwould be developed, for example, to carry out Government commitments tofind new Jobs for displaced rail workers, to retraln them, to payseverance allowances, and to assume responsibility for their unfundedpension liabilitles.

Prompt formulation of an Enabling Actions Plan Is crucial to thesuccess of the restructured railway, because the longer legal,legislative, regulatory, and other administrative obstacles delay theefficient commencement of operation as a full-fledged commercialenterprise, the lesser are Its chances for success In ending thefinanclal hemorrhaging which affilcts so many national railway systems.

26

ENDNOTES:

1. Stewart Joy, "Railway Costs and Planning," Journal of TransportEconomics and Policy (January 1989), 52.

2. See World Bank, The Railways Problem (1982); Eric W. Beshers, Conrall:Government Creation and Privatizatlon of an American Railroad (1989);and Sir Robert Reid, Institutional Reform In Transport: The BritishRall Experience (1989).

3. See, e.g., Dieter Havilcek, Experience with Labor Redundancy SchemesIn the Transport Sector In Western Europe, the United States andJapan, World Bank Report INU 9 (April 1988); Alice Galenson, LaborRedundancy In the Transport Sector: A Review, Wc;rld Bank Report INU36, (January 1989); and, J.C. Kohon and L.S. Thompson, InstitutionalReform In Transport. Case Study: Uruguayan Railways, to be Issuedby the World Bank In late 1989 or early 1990).

4. Some countries have used specially-appointed Independent groups ofknowledgeable people to develop such plans. They are presumed tobe more objective, and, If properly constituted, can broaden thearena within which all Interested groups can make their views known.They can also perform the useful function of serving as lighteningrods for criticism from Interested parties who perceive that theymay be harmed by the Plan. Many of the successful restructuringsthat have occurred -- e.g., France, U.K., and U.S. -- have used thisapproach for at least part of the Plan's development.

5. George A. Steiner, Strategic Planning (1979) [hereafter StelnerL, p.192.

8. The term "Ramsey" pricing means a form of discrlminatory pricingsuch that tariffs deviate from marginal cost In Inverse proportionto the price elasticity of demand for the service In question. See,for example, W.J. Baumol and D. Bradford, "Optimal Departures fromMarginal Cost Pricing," American Economic Revlew, 60 (1970) 265-283.In the body of the paper this has been called "fully commercial" or"value of service" pricing.

7. Experience to date with rail rate deregulation In the United States,Canada, and several European countries shows that contract rateshave been enormously successful from the standpoints of bothshippers and railways.

8. For example, In 1984 the Uruguayan railways carried roughly onlyone-third of Its rldership at full fare, one-third on various farediscounts, and one-third on free passes.

27

9. For example, on an Asian rallway, a requirement to accept thelowest bid In all procurement actions has resulted In the acquisitionof 14 different locomotive models. Thus prevented fromstandardizing Its equlpment, the railway has had to maintainseparate mechanics and parts systems for each model, therebyIncurring hlgher overall costs.

10. "[Plerhaps Cthel most significant reason for Integrated logistics Isthat the complexity of contemporary logistics require Innovativesolutions. The challenge for the coming decade Is to develop newways of satisfying logistical requirements, not simply usingtechnology to perform old ways more effilciently.' D.J. Bowersox, D.J.Closs, and O.K. Helferich, Logistical Management, 3rd ed. (1986), p. 15.

11. In business strategic planning circles this weighing of externalopportunities and threats against Internal strengths and weaknessesIs sometimes referred to as WOTS UP analysis (Weaknesses,Opportunities, Threats, and Strengths Underlying Planning). SeeSteiner, p. 19.

12. Ibid., p. 20.

13. Contemporary shippers which practice "total cost" productlon andlogistics strategies may demand (and pay for) high cost transportservices In order to minimize costs elsewhere In their operations.

14. C.J.D. Driver and l.A. Brown, "The Response of British Railways to theChallenge from Road Haulage In a Deregulated Environment," RailInternational (February 1989), 19.

15. A better phrase In English might be Memorandum of Agreement orMemorandum of Understanding (a term used recently In Kenya).

16. See John Neilis, Contract Plans and Public Enterprise Performance,World Bank WPS 118 (October 1988).

17. For Instance, the objective of British Rail's non-Governmentsupported services (freight, parcels, and Intercity passenger) Isjointly to achieve a return on assets of 2.7 per cent aftercharging current cost depreciation but before Interest. BritishRailway Board, 1988 Corporate Plan, p. 2.

18. British Rail set the objective of reducing support to the passengerralway 25 per cent over three years and another 25 per cent inthe next three year period. Ibid.

19. Uruguay actually eliminated all passenger services In 1988.

20. The traffic costing models developed by OFERMAT for use InCameroon and by CIDA for use In Tanzania could serve as usefulreferences.

28

21. M. Lehmann, "Product Management: A Challenge to the Future of theRailways," Rail International (February, 1989), S.

22. See, for example, M. B. Lawrence and R. G. Sharp, "Rail ProfitResponsibility and Profit Measurement," July 1989, a Journal of theTransportation Research Forum preprlnt.

29

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