problems, opportunities, implications and priorities for rai april 28, 2004 1 ? moradkhani general...

Problems, Opportunities, Implications and Priorities for RAI April 28, 2004

1

? Moradkhani General Director, Bureau of Planning & Budget

Kamyar GolestanianProject Manager, Organization Structure design project

April 28, 2004 (1383/2/9)

Problems, Opportunities, Implications and Prioritiesfor RAI


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PART I

Basic Problems and Opportunities In Railway Industry


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Decreasing market share

Decreasing Government funds

Annual cost growth more than revenue growth

Major Problems


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1991-1992 2001-2002 Avg. Annual Growth

Rail Road Rail Road Rail Road

Freight Ton-km (000,000,000)

7.70 34.2 15.80 83.60 7.4 8.5

Share % 18.38 81.62 15.90 84.10 - -

Tons (000,000) 16.98 58.00 26.46 298.0 4.5 16

Share % 22.65 77.35 8.16 91.84 - -

Passenger Passenger-km

(000,000,000)

4.80 29.00 8.60 52.00 5.4 5.4

Share % 14.20 85.80 14.19 85.81 - -

Passengers

(000,000)

8.10 99.40 14.35 389.30 5.3 13.2

Share % 7.53 92.47 3.56 96.44 - -

Subsectoral share in transport


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1991-1992 2001-2002 Growth%

Road Sector 31.7 56.2 24.5

Rail Sector 31.8 27.2 -4.6

RAI 16.6 10.7 -5.9

Subsector share in total Government funds


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PART II

RAI’s attempts in Restructuringand Privatization


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Compliance with general government policies like decreasing government role in operations and holding governance role, development in private sector participation, …

Improving quality, efficiency and productivity

Implementing more flexibility in responding market demand

Cost reduction and finding appropriate ways in covering heavy depreciation costs

Restructuring and Privatization main drivers


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Converting governmental railway institute to Railway Company (1993)

Corporatization of Railway Company

Transfer of of infrastructure maintenance personnel and activities to Sleeper production company

Transfer of buildings and stations management activities to Ballast company

Restructuring and Privatization main drivers

Preliminary steps


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1) Service contracts

2) Outsourcing

3) Leasing from private sector

4) Partnership and Joint venture

5) Making financing facilities

6) Leasing to private sector

Restructuring and Privatization activities

Main Methods


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Several service contracts in non-core activities like catering, cleaning, health services, …


1) Service contracts


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More than 400 annual outsourcing contracts including fleet, signaling&communication and Infrastructure maintenance


2) Outsourcing


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Leasing wagons and locomotives (in progress)


3) Leasing from private sector


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Establishment of joint railway freight companies with big customers (in progress)

Initial investment of private sector about $60 million(?)

planned to run about 5000 wagons (about 30% of current total wagons) by these new railway companies

RAI share in these companies is planned to be a little more than 50%


4) Partnership and Joint Venture


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During the last 4 years more than $25 million was financed to private sector for buying passenger fleets and freight wagons due to RAI support


5) Making financing facilities


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Leasing Infrastructure maintenance equipment to private sector (in progress)


6) Leasing to private sector


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Reducing cost of track Maintenance per km by $8000 to $1700

…

Achieved Results


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PART III

Organizational Structure Design Project Overview


18 Background

Project Overview

Designing a new Organizational Structure for RAI as the main project goal

No strategy was defined and there were no interest in developing the corporate strategy prior to implementing a new organizational structure

Review the experience of some countries in Railway Restructuring (Sweden, UK, Germany, Argentina, Mexico, US, Japan, China, India)


19 Background

Project Overview (2)

3rd Five Year Development Plan regarded as general guidance and overall strategic direction

Scenario Building method chosen for mapping general industry evolution and future industry structure in order to design new RAI’s organization structure

Started About One year ago

Still running


20 Background

Practical project challenges after startup

Insufficient and undocumented information

High level of reliance on personal interviews with managers

No clear direction set by TFYP


21 Background

Levels of Analysis

Level 3 – Company LevelLevel 3 – Company Level

Level 2 – Corporate LevelLevel 2 – Corporate Level

Level 1 – Industry levelLevel 1 – Industry level


22 Main Analysis Tool

Railway Industry Conceptual Model

Focusing on major elements of industry: Their role and relationship

A Conceptual framework helping analyze, develop and evaluate different unbundling scenarios


23 Industry Conceptual Model

Asset ModelAsset Model

Railway

Industry

Railway

Industry

Process Model

Process Model

StakeholderModel

StakeholderModel



Stakeholder Model

Classified in 28 Major stakeholder groups including customers, passengers, government bodies, Neighbor countries railways, suppliers, financers, …

Relationship according to RAI was classified and analyzed based on relative bargaining power



Process Model

Defining 6 major business area:

1) Freight

2) Intercity Passenger

3) Regional & Suburban Passenger

4) Rail Network

5) Freight Terminals

6) Passenger Stations

Identifying different process roles like process owner, customer, partner and stakeholder was identified for each process in each business area


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Planning

Auditing&Control

Marketing&Sale

Operation

Maintenance

Development

Main processes in each business area

Industry Conceptual Model


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Industry Planning

Map of Process model (Total 38 processes)

Industry Conceptual Model

Industry Regulation & Control

Freight Intercity Passenger Regional Passenger

Terminals Rail Network Passenger Stations



Asset Model

Classifying main assets in 14 tangible and 6 intangible asset groups

Tangible assets include Locomotives, wagons, depots, rail network, maintenance equipment, …

For each asset group the ownership structure (public, private) , utilization type (leasing, owner direct utilization) and major issues for private sector investment was analyzed


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PART IV

Main Issues - Company level


30 Main Issues: Company Level

Command and Control paradigm is shifting to Standard and Contract

A new culture is needed for supporting this new paradigm covering better communication, openness, more documentation, standardization, …

The need for government approval for changing job definitions, organization structure changes, Hiring new personnel, …

Expectation of government bodies to manage the organization in a commercial and innovative way!



Scheduling train movements and path allocation methods and systems are out of date

Network Capacity Improvement process is weak

Formal methods and procedures in almost every area are outdated

There is no powerful culture and incentive to reduce costs

Marketing is still mostly centralized



There is no managerial and industrial accounting system so the full cost of different services including freight, passenger, network access and traction power are not calculated precisely


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PART V

Main Issues - Corporate level


34 Main Issues: Corporate Level

No corporate strategy

Need for more coordination and cooperation between passenger and freight companies especially in mid-term and long-term planning

In service contracts, high transaction costs between group companies because of very high insurance fees in contracts (between 8% to 15%)


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PART VI

Main Issues - Industry level


36 Main Issues: Industry Level

Structure and amount of government funds

Railway industry planning: Whose responsibility?

Separation of Infrastructure building and operation in MRT

Government Strategy in energy price

Governmental promotion and regulation in safety

Environment: how much important is it to government?

Major Issues



Inexperienced and Financially weak private sector in transport sector

The need to utilize commercial, managerial and engineering knowledge and skills of private sector in railway industry

Major Issues (2)



Mixed Public and Private ownership

More Outsourcing More Auditing and quality control

More concern in provinces to build commuter services, but under municipalities authority

More foreign Investment

Decentralization in government Regionalization?

Major trends



Making Competition in Rail Industry

Introducing separate regulatory body

But:

Lack of National transport policy and Railway strategy raises the risk to introduce incompatible and non-integrated legislation and inadequate decision making which may threat private sector participation

Directions foreseen in 4th Five year Development Plan



What role the rail Subsector must have in future economic and social development of IRAN? (according to the 20 year vision and national development plans)

Follower, Driver or becoming a burden?

The strategic question


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PART VII

Major Scenarios for future Industry structure


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Selling to private sector and concession is unlikely

Competitive access to rail must be introduced (Due to legislation)

Network density will improve substantially in near future (about 30% of current track length will be added to the network in less than 5 years) which means the growth in operations need to accelerate

Decentralization in government, highly centralized structure in RAI: Increasing need to build more efficient relationship with provinces

Major Issues in developing scenarios

Major Scenarios


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Ownership of the network must be held by government (Due to Legislation)

The structure must promote private sector to become more and more active in railway industry

In fact, commercialization and not privatization must be the main driver in structural changes

Major Issues in developing scenarios (2)

Major Scenarios


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4 major Scenarios

Major Scenarios

1) Vertical integrated structure with competitive access (Current structure with competitive access for private sector)

2) Vertical separation of network (with total or major ownership of government) and operations with competition in operations between public and private companies

3) Regional Governmental companies with competitive access in each region for other regional companies, no dominant private sector company (Current movements in India and China)


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4 major Scenarios (2)

Major Scenarios

4) Regional Governmental companies with competitive access for both private and public companies


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Thanks for your attention

problems, opportunities, implications and priorities for rai april 28, 2004 1 ? moradkhani general...

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