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Romanian Railway Reform Case Study Ray B. Chambers Chairman Seneca Group International.

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Presentation on theme: "Romanian Railway Reform Case Study Ray B. Chambers Chairman Seneca Group International."— Presentation transcript:

1 Romanian Railway Reform Case Study Ray B. Chambers Chairman Seneca Group International

2 Seneca Group, LLC is an international consulting company specialized in rail transport industry. Headquarters: Seneca Group, LLC - Washington, DC Seneca Group International - Bucharest

3 What consultancy Seneca offers? 1.Organizational Restructuring and Business Planning 2. International Project Management 2. International Project Management 3. Transportation Policy Analysis, Reform and Development 4. Technical Assistance for Concessions and Privatizations Privatizations 5. Logistics in transport field 6. New Technology Development and Marketing 7. Executive Training and Education

4 Seneca International Projects Transportation Transactions – A Record of Creating Value CompanyTransactionValue Railway of Azerbaijan Consulting Services to support the Restructuring and Revitalizing the, Trade and Transport Facilitation Southeast Europe (TTFSE) Chicago & Northwestern Railway (U.S.) Member of executive Team that secured financing for management buyout. Enterprise value over $2 billion CB Transportes (Chile)Creation of a Railway Holding Company.$20 million FEPASA (Chile)Privatization.$30 million Ferrocarril Oriental (Bolivia)Privatization.$25.7 million Fox River Valley Railway (U.S.) Sale of 250 miles of light density track to new operator. $67 million Little Ferry Intermodal Facility (U.S.) Developed raw real estate into intermodal yard and sold to Class I railway. $20 million capital gain on sale Nuevo Central Argentino (Argentina) Privatization$40 million Paducah & Louisville Railway (U.S.) Sale of 250 miles of rail line to create new regional railway $125 million

5 Seneca Projects in Romania Railway Modernization of Project of Bucharest-Constanta Line (JBIC, 2002 – present). Marfa Financial Strategy Project (2003 - 2006) (CFR Marfa). Petrom – OMV, Primary logistic project (2005-2007) City of Bucharest: Public Transport Reform (EBRD, 2004-05). CFR Corridor Feasibility Analysis (CFR, 2002). Technical Assistance for Implementing the Restructuring of the Romanian Railways (EBRD, 2001). Management Training Seminars for CFR and CFR MARFA (CFR, 1999, 2001 & 2003). Romanian Railways Management Services (CFR, 1999). Technical Assistance for Acceleration of the Romanian State Railways’ (SNCFR) Restructuring (CFR, 1998).

6 World Wide Railway Failure Wave of Reform Sweeps the Globe Failure & Reform in US Northeast bankruptcies Passenger – Nationalization & Metropolitan Regionalization Freight - Nationalization & back to Privatization In Canada CN Privatization – Illinois Central Purchase In LATIN AMERICA Argentina – 1 st Seneca International Project

7 Wave of Reform Sweeps the Globe In Europe - EU Commission 91-440 Sweden 1 st to separate infrastructure & moves to operations privatization Germany, France and others begin some reform Britain – The Thatcher Government makes the Great Leap Forward

8 East European Rail - Downhill Slide 1990 - A New Regime - A hard transition to a market economy 1997 - SNCFR Romanian Railway -5 th largest in Europe - 11,000 Kilometers of Track -Traditional Political Interference at all levels of railroading

9 What was Wrong in Romania 1997 - The Railroad SNCFR was Losing Cash -Too many employees -Losing Traffic -Cross Subsidy - Freight to Passenger Minister of Transportation Basescu to Chambers “What is America’s secret? How does it run profitable freight railroads?”

10 Romania Best Practices Best Practice #1 – Create a detailed Plan of Radical Restructuring (I recommended the US Final System Plan Model) Best Practice #2 – Separate Infrastructure from Operations (from the EU – Britain was the most extensive model at the time-1997)

11 Planning Radical Reform – The US Model Starting in the Northeast – The US Railway System was failing. By 1970: - Too much regulation - The Government funded Highway system drove freight from rail to truck & people into cars - The Rise of Aviation – Killed profitable rail passenger traffic Romania Best Practices

12 1970s - Northeast Railroads in Bankruptcy BP #2 The Final System Plan of Radical Reform 1973 – Regional Rail Reorganization Act - FSP US Railway Association – Government -Finance and Plan Conrail created out of bankrupt estates- 1976 – Conrail begins operating-Government owned Staggers Act of 1980 – Major deregulation 1985 – Conrail goes private through share sale $2.1 b 1995 – ICC Abolished – Surface Transportation Board Created 1997 – Conrail sold to CSX & Norfolk Southern $11 b

13 Best Practices & Worst Practice The British Model 1992 – Rush to Full Privatization Reform began under PM Majors accelerated by Thatcher 25 Operating Passenger Franchises Rapid Growth in Passenger Traffic Freight Franchises Offered English – Welsh & Scottish - Strong Growth No exclusivity (Freightliner and new operators coming on line

14 Infrastructure – Railtrack Railtrack infrastructure was historically under maintained – Track was deteriorated All work was contracted-Railtrack lost control of its contractors – Work was fractured in districts New trains created congestion on the Track – On Time Performance fell 2000 Hatfield Accident – Result slow orders shattered train service reliability – Terrible publicity Government Response – Network Rail – Stakeholder owned – Not for profit Wave of Reform Sweeps the Globe – The British Model

15 Conclusions on British Privatization The “Cold Turkey” Privatization of Railtrack caused enormous problems. But - Passenger business is up Freight business is up & going international The System is safer that it has ever been Rail Track was a “Worst Practice” but Passenger & Freight Privatization used some “Best Practices.” Wave of Reform Sweeps the Globe – The British Model

16 How to Apply Best Practices in Romania MoT applied to the World Bank for a loan to create an accelerated restructuring plan for the Romanian Railway System according to EU Commission Order 91- 440. There was a competitive tender which was won by Seneca

17 Seneca Guidelines in Romanian Restructuring Best Practice #3 The Rule of Political Buy-In Basescu was “hands on” through the entire process Best Practice #4 – Ministry-Consultant Partnership – Vasile Olieveschi – Chief of Reform 1.Romanian culture, strategy & objectives communicated to Consultants 2.Consultant Reform Objectives to RR Executives & Back

18 Romanian Rail System Planning 1997 Jan. 1 to May 1- Preliminary Report with Recommendations to Basescu May Draft The Emergency Law July 3 – Meet with Basescu to Finalize July 6 – Final Review of Law and Implementation Plan July 7– All Parties Sign Off—Emergency Law Passes Parliament

19 Principals of Romanian Reform PLANNED to a Fine Level of Detail EU RULES – Infrastructure, Freight & Passenger separated into independent Companies No Holding Company – But Minister holds the stock of each Company Training – Training & More Training

20 Principals of Reform New Companies - Clean Start No Debt – No excess employees Best Practice # 5 Remove the historic debt Japanese Railway Model (Resettlements Corporation Best Practice # 6 No Excess Employees – The Latin American Model

21 The Plan Kept SNCFR The Residual of the Original Railroad SNCFR Kept all Employees Transferred only requested employees to operating company on Day #1 Made payments to excess employees (about one year salary) SNCFR Kept all the historic debt (government obligation) Operating Companies took only debt with assets need for the operation

22 CFR - Infrastructure 50 year concession – No plan to privatize Customers are the Freight & Passenger Operators Train dispatching Maintain the Right of Way Safety Capital Improvements Manage property, real estate and hotels

23 CFR Marfa - Freight State Owned Stock – Goal is Privatization An Stand Alone Company - No Exclusive Franchise Freight Operations Port Operations Ferry-boat Operations Freight Service Marketing Locomotive & Wagon Maintenance

24 Best Practice #7 Create as Many Private Companies as Possible Special Law Independent Freight operators Another Basescu initiative New Operators are putting tremendous pressure on MARFA About 30 new railroads About 20% of the freight market

25 CFR – Calatori – Passenger Stand Alone Company – Did not recommend privatizing For Profit Company Public Service Obligation Contracts for social service –”No Train Should Run at a Loss” -Student –Seniors-Soldiers – Paid by Agencies -PSOs generally not working as they should The Political Imperative for Service Remains

26 CFR Calatori - Passenger Calatori’s role is: Local & Long Distance Passenger Service Design & Marketing Service (Design & Quality) Locomotive & Coach Maintenance Safety, Security and Claims

27 SAAF – Rail Asset Management Services Company Best Practice # 7 Create New Private Companies SAAF SAAF took all assets not transferred to core Operating Companies “Targets of Privatization Program” Intermodal Freight Construction Companies Passenger wagon rebuilding & leasing Telecommunications Real Estate - Hotels

28 Best Practice # 8 When Splitting Operating Companies there must be an Independent Regulator AFER – The Safety Regulator (US FRA Model) Safety Rules and Regulations Licenses for New Operators (with CFR-Infrastructure) Training There is No Economic Regulation of Operating Railroads

29 Best Practices in Romania Summary 1. A Radical Reform Plan (USA) 2. Separation of Infrastructure from Operations (EU) 3. High Level Political Buy-In to Plan (Romania) 4. MoT Reform Lead- Consultant Partnership (Romania) 5. Remove Historic Debt (Japan) 6. Remove Excess Employees (Latin America) 7. Introduce as many Private Companies as possible (Britain) 8. Independent Safety Regulator (USA)

30 Areas to be Addressed Marfa Privatization CEE Interoperability - 2007 Track Access & Track User fees Common Safety Rules & Regulation Train Control Border Crossings Common Training – Training & More Training Project Management

31 Areas to be Addressed Unified Highway & Rail Infrastructure Investment Fund Operators should pay fair share – Truck & Railroad Direct & indirect subsidies – Fully Transparent Investment should go to projects with greatest benefits Energy, Congestion, Pollution and Safety

32 From Inception to Implementation... solutions for the rail and transit industries...

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