1. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 1 ? Moradkhani General Director, Bureau of Planning & Budget Kamyar Golestanian Project Manager, Organization Structure design project April 28, 2004 (1383/2/9) Problems, Opportunities, Implications and Priorities for RAI

2. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 2 PART I Basic Problems and Opportunities In Railway Industry

3. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 3  Decreasing market share  Decreasing Government funds  Annual cost growth more than revenue growth Major Problems

4. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 4 1991-19922001-2002 Avg. Annual Growth RailRoadRailRoadRailRoad Freight Ton-km (000,000,000) 7.7034.215.8083.607.48.5 Share %18.3881.6215.9084.10-- Tons (000,000)16.9858.0026.46298.04.516 Share %22.6577.358.1691.84-- Passenger Passenger-km (000,000,000) 4.8029.008.6052.005.4 Share %14.2085.8014.1985.81-- Passengers (000,000) 8.1099.4014.35389.305.313.2 Share %7.5392.473.5696.44-- Subsectoral share in transport

5. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 5 1991-19922001-2002Growth% Road Sector31.756.224.5 Rail Sector31.827.2-4.6 RAI16.610.7-5.9 Subsector share in total Government funds

6. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 6 PART II RAI’s attempts in Restructuring and Privatization

7. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 7  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

8. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 8  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

9. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 9 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

10. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 10  Several service contracts in non-core activities like catering, cleaning, health services, … Restructuring and Privatization activities 1) Service contracts

11. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 11  More than 400 annual outsourcing contracts including fleet, signaling&communication and Infrastructure maintenance Restructuring and Privatization activities 2) Outsourcing

12. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 12  Leasing wagons and locomotives (in progress) Restructuring and Privatization activities 3) Leasing from private sector

13. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 13  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% Restructuring and Privatization activities 4) Partnership and Joint Venture

14. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 14  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 Restructuring and Privatization activities 5) Making financing facilities

15. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 15  Leasing Infrastructure maintenance equipment to private sector (in progress) Restructuring and Privatization activities 6) Leasing to private sector

16. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 16  Reducing cost of track Maintenance per km by $8000 to $1700  … Achieved Results

17. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 17 PART III Organizational Structure Design Project Overview

18. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 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. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 19 Background Project Overview (2)  3 rd 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. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 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. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 21 Background Levels of Analysis Level 3 – Company Level Level 2 – Corporate Level Level 1 – Industry level

22. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 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. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 23 Industry Conceptual Model Asset Model Railway Industry Railway Industry Process Model Process Model Stakeholder Model Stakeholder Model

24. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 24 Industry Conceptual Model 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

25. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 25 Industry Conceptual Model 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

26. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 26 Planning Auditing&Control Marketing&Sale Operation Maintenance Development Main processes in each business area Industry Conceptual Model

27. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 27 Industry Planning Map of Process model (Total 38 processes) Industry Conceptual Model Industry Regulation & Control Freight Intercity PassengerRegional Passenger TerminalsRail NetworkPassenger Stations

28. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 28 Industry Conceptual Model 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

29. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 29 PART IV Main Issues - Company level

30. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 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!

31. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 31 Main Issues: Company Level  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

32. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 32 Main Issues: Company Level  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

33. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 33 PART V Main Issues - Corporate level

34. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 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%)

35. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 35 PART VI Main Issues - Industry level

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

37. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 37 Main Issues: Industry Level  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)

38. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 38 Main Issues: Industry Level  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

39. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 39 Main Issues: Industry Level  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 4 th Five year Development Plan

40. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 40 Main Issues: Industry Level 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

41. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 41 PART VII Major Scenarios for future Industry structure

42. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 42  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

43. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 43  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

44. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 44 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)

45. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 45 4 major Scenarios (2) Major Scenarios 4)Regional Governmental companies with competitive access for both private and public companies

46. Problems, Opportunities, Implications and Priorities for RAI April 28, 2004 46 Thanks for your attention