Transcript David Soule (Eng) - World Bank Group

State of the Romanian Railways
from the Consultant’s Perspective
Presentation to the
Workshop on Continued Restructuring of the Romanian Railways
Crowne Plaza Hotel
Bucharest, April 22-23, 2002
The Seneca Group, LLC
Seneca International Ltd.
Seneca International Ltd.
122 C Street, NW, Suite 850 Washington, DC 20001
68 Lombard Street, London EC3V 9LJ
Bucharest Office
Phone: (1) 202-783-5861 Fax: (1) 202-783-6096
Phone: (44) 207 868-1695 Fax: (44) 207 8681800
Phone/Fax: (40) 1 223-2738
www.senecagrp.com
www.senecagrp.com
www.senecagrp.com
State of Romanian Railways

Review the IFI funded Technical Assistance
Programs

The conclusions reached

The recommendations made

The actions taken
2
Phase 1 – Design Institutional Framework (WB Financed)

Institutional Restructuring of the Railway System
 Emergency
Ordinance No.12/98
– Separate the Infrastructure, Passenger and Freight operations
– Eliminate the historic debt to the government
– Create a regulatory body to govern the safety of the system and
license new operators
– Support the Social Services associated with passenger operations
– Deregulate freight tariffs
3
Implementation Problems
 Lack
 No
of Start-up capital
operating agreements
 Duplication
 Build
of services
up of administrative regimes
4
Phase 2 – Technical Assistance for Restructuring (EBRD Financed)
Restructure companies into commercial enterprises in
preparation for privatization


–
Determine Pre-Privatization Guidelines
–
Continue Commercialization
–
Prepare Business Plans and a Financial Model
–
Identify Early Privatization Potentials
–
Separate Operating from Non-Operating property
–
Improve Cost Accounting System
–
Define New Regulatory Environment
–
Provide Training Requirements
–
Prepare Privatization Program
Final Report submitted in November 2001
5
Improve and Computerize Accounting System


The railway’s accounting system was designed for
government reporting
Provides no useful information to perform cost and economic
analyses
» Should determine expenses associated with the type of work
performed or a specific location
» Seneca assisted in the design of Chart of Accounts
Status:
» Addressed by the Ministry through the Phase 3 Technical
Assistance program funded by PHARE (currently in progress)
» The IRIS system is being fed into Oracle Financial
6
The railway must be resized and rationalized

The current volume of traffic is significantly lower than its
design capacity:




1989: 300 million t of freight/ 2200 pass. trains per day
2001: 70 million t of freight/1500 pass. trains per day
Very high cost of operation and maintenance of the system,
compared to other systems in Europe
System must be rationalized to reduce cost
Status:
»
»
Both CFR Marfa and CFR Calatori have developed density maps
showing low line segment volume
No program has been developed to begin the
rationalization process
7
Non-railway subsidiaries separated from railway operations


CFR Marfa operates subsidiary companies providing support to
the mother company (wagon cleaning, transloading, combined
traffic and terminal operators)
CFR operates subsidiary companies, which are not directly related
to the operation of the railway: IT Center, Training Center,
Telecommunication Agency, hotels and resorts, manufacturing
plants for electrical hardware (SPIACT), rail welding company
(Sudarec), printing company (Filaret) and sports stadium (Rapid)
Status:
»
»
IT Center, Training Center, SPIACTs, Sudarec, Filaret, Rapid
subsidiaries already outsourced
The separation process will be done by June 1, 2002
8
Implement A Fair Infrastructure Access System



Track access charges must be based on usage and operational
cost factors
Government must pay for passenger services – stop cross
subsidy from freight
Regulations must ensure new operators and CFR Marfa are
treated fairly – avoid “Cherry Picking”
Status:
»
»
»
»
In 2002, CFR Marfa: €5.8 per train-km, CFR Calatori: €1.3 per train-km
Access Fees still do not reflect usage and operational cost factors
Freight subsidizing passenger
10 New freight operators are licensed
9
Commercial Relationships Must Be Established For CFR Marfa

CFR Marfa - serious accounts receivable and cash problems
since its inception in 1998

State owned companies cannot pay CFR Marfa

CFR Marfa cannot meet its obligations to suppliers and CFR

CFR Marfa has not taken tariff increases fast enough to keep
up with inflation
Status:
» Privatization of Marfa’s Customers
» Government must guarantee payments from State Companies
10
Prepare Business Plans and Annual Budgets



Current Budgeting for government only
No Long term planning
No budgetary follow up
»
»
Develop 5-Year Business Plans for CFR, CFR Calatori, CFR
Marfa
Objectives of the business plans
 Establish goals that are realistic and attainable
 Establish priorities and identify risks
 Provide a means to measure the results
Status:
» Seneca prepared Business Plans
» No feed-back received from the Railways
11
Basic Assumptions of the Business Plans
 CFR
and CFR Calatori will remain government owned
companies
 CFR Marfa shall be privatized (the specific date was not set)
 Financial projections are in constant lei based on the exchange
rate of 21,764 lei per $1 US dollar.
 Infrastructure access fee is based on Seneca model with 50/50
split between freight and passenger
 Romanian government will not alter the current policies that
affect the various modes of transportation
 The economy shall remain stable over the 5 year period
12
CFR Business Plan Goals

Design and operate a safe and efficient railway

Meet the transportation needs of the Romanian economy

Fulfill the requirements of EU integration

Develop procedures to implement Access Fee

Reduce expenses through efficiency gains and cost reductions
– Lead to reduction in Access Fee charged to operators
– Reduce dependence on government subsidy

Eliminate unprofitable non-operating subsidiaries

Reduce employment by 30% over 5 years, but increase real wages
by 2% annually
13
Key Assumptions
 Size
of system will be reduced to meet traffic projections
 Access Fee revenue is based on volume projections from
Marfa and Calatori business plans
 Financials were designed to produce breakeven results over 5
year period of the plan
 CFR will privatize non-operation units in Year 1
 Existing modernization programs funded by external sources
will continue
 Investments will be made to reach efficiency goals
 Financial functions will be handled by SMF until at least
Year 4
14
5 Year Financial Statement
CFR 5 Year Income Statement
In lei (millions)
BASE
YEAR
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
REVENUE
Access Fee
State Subsidies
Rents & Leases
Sales of Scrap
Other Operating Revenues
Other Revenues
4,871,800
638,000
141,500
109,300
1,011,200
154,000
4,328,452
574,200
141,500
98,370
1,011,200
170,700
3,934,781
510,400
141,500
87,440
1,011,200
170,700
3,743,257
478,500
141,500
81,975
1,011,200
170,700
3,729,123
478,500
141,500
81,975
1,011,200
170,000
3,778,531
478,500
141,500
81,975
1,011,200
170,000
Total Revenues
6,925,800
6,324,422
5,856,021
5,627,132
5,612,298
5,661,706
EXPENSES
Materials
Wages & Benefits
Other Operating Expenses
Other Expenses
3,449,700
2,837,480
234,200
325,400
3,176,449
2,598,926
228,000
321,047
2,947,278
2,359,696
228,000
321,047
2,833,923
2,243,074
229,088
321,047
2,830,028
2,287,935
173,288
321,047
2,833,677
2,333,694
173,288
321,047
Total Expenses
6,846,780
6,324,422
5,856,021
5,627,132
5,612,298
5,661,706
79,020
0
0
0
0
0
INCOME BEFORE TAX
15
Consultant Recommendations for CFR
 Expedite
development of formal Access Fee
 Study system activities determine level infrastructure required
 Non-safety related capital projects to be ranked by return on
investment (ROI)
 Continue to outsource capital improvement programs
 Develop procedures to determine maintenance levels tied to
operator needs rather than design life of structure
 Expedite mechanization of maintenance activities
 Streamline organizational structure to become customer
oriented
16
Calatori Business Plan Goals
 Determine
and safely operate the correct level of rail passenger
service required
 Procure the correct equipment required to provide the service
 Reduce government subsidies by 30% over 5 years by
maximizing operating efficiencies and reducing overhaul costs
 Market service to maximize ridership
 Develop opportunities to grow revenue (i.e. ticket collection,
increase fares for business trains)
 Reduce employment by 25% over 5 years, but increase real
wages by 2% annually
17
Calatori Key Assumptions
 Fare
levels will keep pace with inflation
 Payments
from the branches of the government will be
received on a timely basis
 Government
will make substantial investment in DMU
and EMU trainsets
 Calatori
will be the only passenger operator during the 5
year period of the plan
18
Ridership Projections
Ridership Variations
(shown as a % of prior year's figure)
Accelerate 1st class
Accelerate 2nd class
Rapid/Expres
s - 1st class
Rapid/Expres
s - 2nd class
InterCity - 1st
class
InterCity 2nd class
Base
Year 0
1
2
3
4
5
---
-4%
-1%
0%
0%
0%
---
-4%
-1%
0%
0%
0%
---
-4%
-1%
0%
0%
0%
---
-4%
-1%
0%
0%
0%
---
-4%
-1%
0%
0%
0%
---
-4%
-1%
0%
0%
0%
Personnal Service
Personnal Brasov
Personnal Bucuresti
Personnal Cluj
Personnal Constanta
Personnal Craiova
Personnal Galati
Personnal Iasi
Personnal Timisoara
Subtotal Personal
---
-4%
-2%
0%
0%
0%
---
-1%
1%
2%
2%
2%
---
-6%
-3%
-2%
-2%
-2%
---
-4%
-2%
0%
0%
0%
---
-4%
-2%
0%
0%
0%
---
-4%
-2%
-1%
-1%
-1%
---
-4%
-3%
-1%
-1%
-1%
---
-6%
-3%
-2%
-2%
-2%
-4.1%
-1.8%
-0.4%
-0.4%
-0.4%
19
Note:
Ridership has
fallen by 10%
each year over
the past several
years. It is
expected to
continue to
decline, but at a
slower amount.
Calatori 5 Year Financial Statement
Table 6.2 - Income Statements for Calatori 2000 Actual Base Year and Years 1 through 5
Assumes 50/50 split on Access Fee w/ Marfa
in million lei at 21,764 lei/dollar
Base Year
Year 1
Year 2
Year 3
3,589,300
3,568,600
Year 4
Year 5
3,598,600
3,594,000
217, 600
435,300
Revenue
Operating Revenues
4,389,200
3,594,900
*State Grants
Other Revenues
24,400
30,500
33,000
35,100
36,200
37,300
4,413,600
3,619,800
3,601,600
3,630,000
3,852,400
4,066,600
Material
4,191,500
3,386,170
3,317,017
3,289,541
3,100,241
2,917,041
Payroll
1,552,500
1,464,700
1,424,000
1,359,800
1,306,700
1,254,100
260,800
245,447
267,547
267,747
434,247
670,147
2,219,100
2,195,556
1,994,482
1,892,405
1,888,870
1,909,635
151,400
150,100
148,800
147,500
147,300
147,100
8,375,300
7,441,973
7,151,846
6,956,993
6,877,358
6,898,023
-3,961,700
-3,822,173
-3,550,246
-3,326,993
-3,024,958
-2,831,423
3,970,500
3,822,173
3,550,246
3,326,993
3,024,958
2,831,423
0%
4%
10%
16%
24%
29%
8,800
0
0
0
0
0
TOTAL REVENUE
Expense
Operating Expenses
Access Fee
Other Expenses
TOTAL EXPENSE
Income and Subsidy
Deficit Prior to subsidy
Subsidy required
% Decrease from base subsidy
NET INCOME
20
Recommendations for Calatori
 Complete
a market study to determine appropriate level of
services to offer
 Prepare
an investment plan to obtain modern equipment and
reduce high maintenance cost
 Aggressively
market new services to stop declining ridership
 Study
tariff structure to determine what segments can sustain
higher ticket prices without losing substantial ridership
 Invest
in automated ticketing systems
21
Marfa Business Plan Goals
 Provide
a safe and efficient service to its customers
 Increase market share in domestic and international markets
 Aggressively pursue new markets
 Modernize equipment fleet and information systems
 Improve working capital and cash-flow
 Provide competitive salaries consistent with a private
operation
 Produce a profit for the private owners (and source of tax
revenue for the government)
22
Marfa Key Assumptions
 The
railway is privatized in Year 1 of the plan
 All freight rates are deregulated
 No new operators will be licensed during the 5 year period of
the plan
 Railway has flexibility to determine staff levels
– A 25% reduction is assumed
 Payments
from government-owned companies will be based on
commercial terms
 Ferry boat service is spun-off in Year 1 of the plan
 Cost of inflation will be passed on to the customers
23
Traffic Projections
Freight Traffic Growth Projections by Commodity Group
Commodity
Percentage Projection Per Year (over prior year)
Year 1
Year 2
Year 3
Year 4
Year 5
0%
0%
0%
-2%
-2%
Oil and Oil
Products
-10%
-5%
0%
0%
0%
Aggregates
10%
5%
5%
1%
1%
Ore, Metal &
Metal Products
3%
3%
3%
3%
3%
Cement Products
5%
5%
5%
0%
0%
2%
2%
2%
2%
2%
2%
2%
2%
2%
2%
2%
5%
5%
5%
5%
Coal Products
Agricultural
Products
Chemicals &
Fertilizer Products
All Other Products
24
Marfa 5 Year Financial Statement
Table 7.2 - Income Statements for Marfa 2000 Actual Base Year and Years 1 through 5
Assumes 50/50 split on Access Fee w/ Calatori
in million lei at 21,764 lei/dollar
Base Year
Year 1
Year 2
Year 3
Year 4
Year 5
Revenue
Operating Revenue
9,452,500
9,414,834
9,693,749
9,938,777
9,875,685
10,005,963
170,700
170,700
170,700
170,700
170,000
170,000
9,623,200
9,585,534
9,864,449
10,109,477
10,045,685
10,175,963
Materials
4,377,900
3,628,085
3,633,296
3,636,365
3,644,530
3,671,004
Wages
1,875,500
1,783,366
1,753,313
1,746,096
1,798,479
1,852,434
339,400
296,675
298,253
292,921
293,030
302,932
2,652,700
2,195,556
1,994,482
1,892,405
1,888,870
1,909,635
266,300
261,947
261,947
261,947
261,947
261,947
9,511,800
8,165,630
7,941,290
7,829,734
7,886,856
7,997,952
-9,511,715
1,419,904
1,923,159
2,279,743
2,158,829
2,178,011
354,976
480,790
569,936
539,707
544,503
1,064,928
1,442,369
1,709,807
1,619,122
1,633,508
Other Revenue
TOTAL REVENUE
Expense
Other Operating Expenses
Access Fee
Other Expenses
TOTAL EXPENSE
Income and Subsidy
Earnings Before Taxes
Taxes
NET PROFIT AFTER
INCOME TAX
25
Consultant Recommendations for Marfa
 Privatize
freight railway as soon as system is prepared to
attract private investor
–
–
–
–
–
Establish long term access fee policy
Establish open access policy
Establish commercial relationships with state-owned companies
Develop clear inventory of rights and assets for sale
The free market shall determine rates when at all possible
 Adopt
profit oriented polices practiced by private companies
 Modernize fleet of wagons to meet needs of the customers
 Reorient corporate culture towards the needs of the customer
and ease of doing business
– Provide incentive compensation26 to those that succeed
Actions Required by the Romanian Government

CFR
–
–
–
–

CFR Calatori
–
–
–
–

Review and approve operating system plan
Approve implementation of Access fee
Approve sale of non-operating subsidiaries
Approve staff reduction plan (in conjunction with increased wages)
Work with Calatori to design service levels which make sense
Provide financing guarantees for equipment investments
Provide sufficient and timely subsidy payments
Approve staff reductions (in conjunction with increased wages)
CFR Marfa
– Set time table and prepare freight company for privatization
– Allow free market to set tariffs
– Provide timely payments to Marfa from government owned companies
27
Employment Adjustments (Base Year – Year 5)
Chart 1 - Rom anian Railw ays Com panies Em ploym ent Adjustm ents
Base Year 0 Through Year 5
120,000
98,853
100,000
87,685
81,935
76,613
Employees
80,000
75,509
74,450
60,000
47,040
40,000
29,000
22,813
43,032
21,09123,562
39,403
22,434
20,098
36,148
21,650
18,815
20,000
36,148
21,650
17,711
36,148
21,650
16,652
0
Base Year 0
Year 1
Calatori
Year 2
Marfa
Year 3
CFR
28
Year 4
Total All 3 Companies
Year 5