RAILWAY REFORM IN ROMANIA

Washington, 10 March 2004Washington, 10 March 2004

V. N. OLIEVSCHIV. N. OLIEVSCHIGeneral DirectorGeneral DirectorDepartment for Railway Department for Railway TransportationTransportation

Main IdeasMain Ideas The European challenges to reform the RailwaysThe European challenges to reform the Railways

Concepts and principles of the Romanian railway reformConcepts and principles of the Romanian railway reform

Main achievements in the Romanian Railway reformMain achievements in the Romanian Railway reform

Adverse factors to be overcomeAdverse factors to be overcome

Next steps in the Romanian Railways reformNext steps in the Romanian Railways reform

Lessons learnedLessons learned

The Euro

pean

The Euro

pean

challenges to

refo

rm

challenges to

refo

rm

the R

ailways

the R

ailways

Călători, Mărfuri, PIB

1990 – 20011990 = 100

Călători (1) (călători km)

Mărfuri (2) (tone km)PIB (la preţuri constante)

Călători, Mărfuri, PIB

1990 – 20011990 = 100

Călători (1) (călători km)

Mărfuri (2) (tone km)PIB (la preţuri constante)

1980-1990

1991-2001

2000-2001

GDP (real growth) 2,3 2,1 1,6

Industrial production 1,8 1,0 0,0

Passengers transport (passengers km)( all transportation modes)

3,0 1,7 1,1

Freight transport (tones km) ( all transportation modes)

1,6 2,7 -0,2

The ratio between The ratio between economical activities / transport necessities in UE-15economical activities / transport necessities in UE-15

The actual transport volumes will double in the next 20 - 40 yearsThe actual transport volumes will double in the next 20 - 40 years

Passengers, Freight, GDP

Passengers (1) (passengers km)Freight (2) (tones km)GDP (constant prices)

Transport market evolution în European Union between 1970 - 2001

Road Rail Maritime Inland waters Pipes

0

200

400

600

800

1000

1200

1400

1600

1970 1980 1990 1991 1995 1997 1998 1999 2000 2001

0

500

1000

1500

2000

2500

3000

3500

4000

1970 1980 1990 1991 1995 1996 1997 1998 1999 2000 2001

X 1000 mil. tone kmX 1000 mil.passengers km

FREIGHT

PASSENGERS

RailRail

RoadRoad RoadRoad

RailRail

Why are our competitors in a Why are our competitors in a better position ?better position ?

First objective First objective of the Common Transport Policyof the Common Transport Policy

To create a single, competitive marketTo create a single, competitive marketfor each transportation modefor each transportation mode

Achieved byAchieved byother modes other modes of transportof transport

#

Only Only beginnings beginnings in railwaysin railways

NrNr Name of DirectiveName of Directive

11 Directive 91/440 on the development of the Directive 91/440 on the development of the Community RailwaysCommunity Railways

22 Directive 95/18 regarding the licenses of the Directive 95/18 regarding the licenses of the railway companyrailway company

33 Council Directive 2001/12 amending Council Council Directive 2001/12 amending Council Directive 91/440 on the development of the Directive 91/440 on the development of the Community RailwaysCommunity Railways

44 Council Directive 2001/13 for the modification Council Directive 2001/13 for the modification of Directive 95/18 regarding the licenses of the of Directive 95/18 regarding the licenses of the railway companyrailway company

European Council Directives (1)European Council Directives (1)

Nr.Nr. Name of DirectiveName of Directive

55 Council Directive 2001/14 on the allocation of Council Directive 2001/14 on the allocation of railways infrastructure capacity and the railways infrastructure capacity and the certification regarding safetycertification regarding safety

66 Council Directive 2001/16 on the Council Directive 2001/16 on the interoperability of the trans-European interoperability of the trans-European conventional railway systemconventional railway system

77 Council Directive 96/48 on the interoperability Council Directive 96/48 on the interoperability of the trans-European high-speed rail systemof the trans-European high-speed rail system

European Council Directives (2)European Council Directives (2)

The unique EuropeanThe unique Europeanrailway transport marketrailway transport market

Accelerated market liberalization– 2007 for freight (including cabotage)– 2012 for passengers in international traffic

Competition between railway operators Revolution in the railway operators’ mentality Harmonization in the interoperability and safety

domains Separated passengers and freight transport

networks (regularity and punctuality) Take over a larger percent of the European transport

market

Romanian Railw

ays

Romanian Railw

ays

Reform

Reform

Factors resisting changeFactors resisting changefor the economies in transitionfor the economies in transition

Management and employees culture of ‘command Management and employees culture of ‘command and control’and control’

No history in the commercial marketplaceNo history in the commercial marketplace Weak technical status (infrastructure and rolling Weak technical status (infrastructure and rolling

stock)stock) Government budget constrains for transitional social Government budget constrains for transitional social

and track subsidiesand track subsidies Economy in transition (difficult to make predictions Economy in transition (difficult to make predictions

about traffic evolution)about traffic evolution) Political instability and changePolitical instability and change

Traffi

c volume

Traffi

c volume

Market s

hare

Market s

hare

Romanian Railways vs. EU-15 (UIC Statistics – 2002)

Germany 141719 72423 69296

France 123263 50036 73227

Italy 69016 23060 45956G. Britain 58100 18700 39400

Romania 25699 17197 8502

Country Mil. Conv. TU Mil. Freight TU Mil. Pass. TU

Spain 32733 13253 19480

Austria 25926 17626 8300

Romanian Railways vs. New EU Members (UIC Statistics – 2002)

Poland 63863 46563 17310

Romania 25699 17197 8502Cech Rep. 22369 15772 6597Hungary 18283 7752 10531

Slovac R. 13065 10383 2682

Bulgaria 7225 4627 2598

Latvia 15764 15020 744

Country Mil. Conv. TU Mil. Freight TU Mil. Pass. TU

Estonia 9874 9697 177Lithuania 10255 9767 488

Romania - Mil. tonne km

Pipe

4%

Sea

4%Rail

40%

Road

45%

Inland waters

7%

UE - Mil. tonne km

Rail

8%

Pipe

3% Sea

40%

Road

45%

River

4%

Romania - Mil. Pass. kmAir

7,9%Rail

44,1%Road

35%

River

0,1%

UE - Mil. Pass. km

Buses

9%

Rail

6%

Air

6%Other

1%

Automobile

78%

Railways transportation market share in Romania and EU(before May 1 2004)

STAGES OF RAILWAY REFORM

1991-1998:

Commercial re-orientation of activities Preparation of the legal framework for the reform

1998:

Main institutional railway reform

1999-2003:

Consolidation of new born companiesNew private operatorsOutsourcing (Subsidiaries of railway companies)

2003-2008Privatization of most of the subsidiariesInter-operability

Consolidation of Romanian Railway business-oriented approach

The major directions The major directions of Romanian Railways Reformof Romanian Railways Reform

New legal environment

Focused organization and management on main line of business

Permanent actions for consolidating a business oriented railway

New legal environment– Competition, free access to markets

– Ownership – public, private, or partnerships

– Transparent subsidies for passenger traffic

– Ballanced State financial support for the road and rail infrastructure

– Outsourcing of ‘non core’ activities

Focused organization and management on main lines of business:

– Infrastructure– Freight

Type of commodity– Passenger

Long distance Short distance

Specific MarketsSpecific Markets

Outsourcing any other activitiesOutsourcing any other activities

Permanent actions for consolidating a business oriented railway

– Labour adjustment in accordance with the demands of the market

– Cutting down the operating costs (surplus assets, closing units)

– Business plans with specific targets – Business-oriented tariff policy

– Methodology for the calculation of infrastructure access charge access charge (avoid cross subsidy)

New Legal Fra

mework

New Legal Fra

mework

Legal Framework for Romanian RailwaysLegal Framework for Romanian RailwaysNr Nr European Council DirectiveEuropean Council Directive Romanian LawRomanian Law StatusStatus

11 Directive 91/440 on the development of Directive 91/440 on the development of the Community Railwaysthe Community Railways

Emergency Ordinance Emergency Ordinance 12/199812/1998

In forceIn force

22 Directive 95/18 regarding the licenses Directive 95/18 regarding the licenses of the railway companyof the railway company

Decision of MTCT Decision of MTCT 778/1998778/1998

In forceIn force

33 Directive 2001/12 amending Directive Directive 2001/12 amending Directive 91/440 on the development of the 91/440 on the development of the Community RailwaysCommunity Railways

Emergency Ordinance Emergency Ordinance 125/2003125/2003

In forceIn force

44 Directive 2001/13 for the modification Directive 2001/13 for the modification of Directive 95/18 regarding the of Directive 95/18 regarding the licenses of the railway companylicenses of the railway company

Order of MTCT Order of MTCT 343/2003343/2003

In forceIn force

55 Directive 2001/14 on the allocation of Directive 2001/14 on the allocation of railways infrastructure capacity and the railways infrastructure capacity and the certification regarding safetycertification regarding safety

Ordinance 89/2003Ordinance 89/2003 In forceIn force

66 Directive 2001/16 on the Directive 2001/16 on the interoperability of the European interoperability of the European conventional railway systemconventional railway system

Decision of Decision of Government 850/2003 Government 850/2003

In forceIn force

77 Directive 96/48 on the interoperability Directive 96/48 on the interoperability of the European high-speed rail systemof the European high-speed rail system

Decision of Decision of GovernmentGovernment 1533 1533//20032003

In forceIn force

Accordance with European Union directivesAccordance with European Union directives

New companies, free of historical debts, capable to New companies, free of historical debts, capable to

supply transport services essential for societysupply transport services essential for society

PSO contribution from the state budgetPSO contribution from the state budget

Turning to account of exceeding assets for Turning to account of exceeding assets for

capitalization of newly established companiescapitalization of newly established companies

Freight tariffs deregulationFreight tariffs deregulation Establishment of immediate privatization goalsEstablishment of immediate privatization goals

More operators allowedMore operators allowed

Main provisions of the new legal Main provisions of the new legal framework 1998framework 1998

[Governmental Ordinance 12 / 7 July 1998][Governmental Ordinance 12 / 7 July 1998]

6 Laws6 Laws

5 Ordinances of Government5 Ordinances of Government

29 Decisions of Government29 Decisions of Government

55 Decisions of Ministry of 55 Decisions of Ministry of

TransportationTransportation

New Legal Framework New Legal Framework 2001 - 20042001 - 2004

Organiza

tion and M

anagement

Organiza

tion and M

anagement

on main lin

es of business

on main lin

es of business

GENERAL OVERHAULGENERAL OVERHAULOF TRACKOF TRACK

GENERAL OVERHAULGENERAL OVERHAULOF ROLLING STOCKOF ROLLING STOCK

PASSENGER PASSENGER COACHES CLEANINGCOACHES CLEANING

COMMERCIALCOMMERCIALACTIVITIES IN ACTIVITIES IN

RAILWAY STATIONSRAILWAY STATIONS

SIGNALLING AND SIGNALLING AND ELECTRIFICATIONELECTRIFICATION

ROMANIANROMANIANNATIONALNATIONALRAILWAYSRAILWAYS

INFRASTRUCTUREINFRASTRUCTURE

FREIGHTFREIGHT

PASSENGERSPASSENGERS

REAL ESTATEREAL ESTATE

Institutional Evolution of Romanian Institutional Evolution of Romanian Railways 1992 - 1998Railways 1992 - 1998

CFR CFR-Marfă CFR-Călători SMF SAAF

S N C F R

Railways Reorganization 1998 - 2004

RailwayRailwayMManagementanagement

CompanyCompany

PassengersPassengersCompanyCompany

AssetsAssetsMManagementanagement

CompanyCompany

FreightFreightCompanyCompany

NationalNationalRailwayRailwayCompanyCompany(Infrastructure)(Infrastructure)

28 private operators28 private operators

RailwayAuthority

The commercial approach in railwayThe commercial approach in railway

SSTTAATT

C F RC F R – Infrastructure Manager– Infrastructure Manager

MarketMarket

PASSENGERPASSENGERRAILWAY RAILWAY

UNDERTAKINGSUNDERTAKINGS

FREIGHTFREIGHTRAILWAY RAILWAY

UNDERTAKINGSUNDERTAKINGS

Public Service ContractPublic Service Contract Four Year Contracts – annually updated

– Infrastructure– Passenger Services

Safety and quality conditions for infrastructure operation

Level of access charge Number of passenger trains to be operated

annually Quality criteria for each type of train Annual subsidy approved by the Parliament

Privatiz

ation

Privatiz

ation

GENERAL OVERHAULGENERAL OVERHAULOF TRACKOF TRACK

GENERAL OVERHAULGENERAL OVERHAULOF ROLLING STOCKOF ROLLING STOCK

PASSENGER PASSENGER COACHES CLEANINGCOACHES CLEANING

COMMERCIALCOMMERCIALACTIVITIES IN ACTIVITIES IN

RAILWAY STATIONSRAILWAY STATIONS

SIGNALLING AND SIGNALLING AND ELECTRIFICATIONELECTRIFICATION

ROMANIANROMANIANNATIONALNATIONALRAILWAYSRAILWAYS

INFRASTRUCTUREINFRASTRUCTURE

FREIGHTFREIGHT

PASSENGERSPASSENGERS

REAL ESTATEREAL ESTATEPr

ivat

ized

Priv

atiz

ed

Institutional Evolution of Romanian Institutional Evolution of Romanian Railways 1992 - 1998Railways 1992 - 1998

NationalNationalRailwayRailwayCompanyCompany

Railways Branches

Rail WeldingCompany

Signaling Equipment

(production &maintenance)

Heavy Track Machinery

Traction PowerDistribution

Engineering &Design

PRIVATIZEDPRIVATIZED

2 RailcarsWashing

CompaniesFreightFreightCompanyCompany

Railways Branches

RailcarsWashing

Companies(2 branches)

Container Distribution

by trucks

TransshipmentRailcars

Maintenance& Overhaulof Railcars

Maintenance& OverhaulLocomotives

PRIVATIZEDPRIVATIZED

PassengersPassengersCompanyCompany

Railways Branches

Sleeping &Restaurant

CoachesOperations

Maintenance& Overhaulof Coaches

(4 branches)

TicketsDistribution Maintenance

& Overhaulof Locomotives PRIVATIZEDPRIVATIZED

Concrete actio

ns for a

Concrete actio

ns for a

business-orie

nted Railw

ay

business-orie

nted Railw

ay

Railway Infrastructure Management Rolling Stock Management Train Circulation Planning and Monitoring Freight Operations & Commercial Management Financial and accounting system Computer based ticketing system

$ 70 Million$ 70 Million BudgetBudget

IRIS

Integrated Railway Information System

IT – Cost reduction tool

Reform of the financial & accounting Reform of the financial & accounting systemsystem

Terms for realization: 2002 - 2006Terms for realization: 2002 - 2006

ObjectivesObjectives– Definition of Profit and Cost CentersDefinition of Profit and Cost Centers– Definition of the cost of each activityDefinition of the cost of each activity– Improved access charge formulaImproved access charge formula– Creation of a cost modelCreation of a cost model

Reduction of operation cost of infrastructure

CFR S.A.Objectives

Non-Interoperable (Low Traffic) Railways Lines

~2.800 km (25%) 2% freight

8% pass.

Interoperable Railways Lines

~8.500 km (75%) 98% freight 92% pass.

Private operation Private operation of low traffic linesof low traffic lines

2.800 km of lines offered for private operation

3 bidding procedure organized 846 km leased to 9 private operators

(31%) 450 km of track closed The lines which will not be leased will

be proposed to be abandoned

Labour adjustm

ent

Labour adjustm

ent

according to

the m

arket

according to

the m

arket

0

50000

100000

150000

200000

250000

sta

ff

salariaţi 202244 197698 185362 178820 155678 141027 137139 133201 106000 105200 104600 97304 88444 74162 67790

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

134134..292 EMPLOYEES LESS – 66.5% 292 EMPLOYEES LESS – 66.5%

Labor adjustmentLabor adjustment

Percentage of personnel cost in EU - 15Percentage of personnel cost in EU - 15

55%55%

45%45%

23% in Romania

Main costs elementsMain costs elementsat CFR SAat CFR SA inin 2003 2003

5%

23%6%2%

1%

34%

1% 28%

Energy & water

Infrastructure repairs

Costs with materials

Personnel costs

Depreciation

Operation costs

Financial Costs

Contracts with third parties

Wages – low shareWages – low share

6%

9%

36%18%

4%16%

11%

Fuel

Repairs

Electrical energy

Access Fee

Personnel Costs

Depreciation

Contracts with third parties

Wages – low shareWages – low share

Main costs elementsMain costs elementsat CFR Cat CFR Căăllăătoritori SASA inin 2004 2004

4%7%1%

2%

4%

9%

29%21%

3%

6%

8%

6%

Fuel

Repairs

Electrical Energy

Access Fee

Personnel Costs

Depreciation

Accounts with foreign railways

Financial Costs

Material Costs

Operation Costs

Contracts with third parties fordiferent servicesOther Costs

Wages – low shareWages – low share

Main costs elementsMain costs elementsat CFR at CFR Marfă Marfă SASA inin 2004 2004

0

50

100

150

200

250

300

350

400

450

500

Poland Slovenia SlovacRepublic

CechRepublic

Romania Hungary Bulgaria

Mil.

TU

Con

v

2002

2003

2004

268

366

339

Romanian Railways ProductivityRomanian Railways Productivityvs. New EU Membersvs. New EU Members

CFR FreightCFR FreightProductivity & personnel evolutionProductivity & personnel evolution

808801

647617

555

655

19.55220.705

26.59127.10429.13228.679

0

100

200

300

400

500

600

700

800

900

1999 2000 2001 2002 2003 2004

0

5000

10000

15000

20000

25000

30000

35000

Productivity (x1000 tone*km/employee) Nr.employees

1999 2000 2001 2002 2003 2004

Productivity (x1000 tone*km/employee) 555 617 655 647 801 808

Nr.employees 28.679 29.132 27.104 26.591 20.705 19.552

Adverse fa

ctors

Adverse fa

ctors

to be overc

ome

to be overc

ome

Adverse factorsAdverse factors

Market evolution European costs (rolling stock, fuel, energy, etc.) Low passenger tariffs Passenger subsidy dilemma High cost of infrastructure Cross subsidies Distortion of market prices in transportation

2188

00

6285

8

1462

70

1114

20

9896

0

9918

0

1051

30

1050

40

9388

0

7651

0

6294

0

7146

2

7180

9

6811

0

6876

3

1428

7

5725

3

3780

9

2817

0

2517

0

2470

4

2717

9

2687

7

2478

9

1970

8

1592

7

1658

4

1719

7

1775

7

1798

2

0

50000

100000

150000

200000

250000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Freight Volume (x1.000 tonnes) Tonnes-km (x1.000.000)

Freight transportation market evolution 1990-2004

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Passengers-km (x100.000) Passengers (x1.000)

Passenger transportation market evolution 1990-2004

GermanyGermany - - 9.0409.040 ItalyItaly -- 7.9287.928 FranceFrance -- 6.8766.876 Great BritainGreat Britain -- 2.9852.985 SwitzerlandSwitzerland -- 2,5652,565 HollandHolland -- 2.2732.273 BelgiumBelgium -- 1.9571.957 AustriaAustria -- 1.9171.917 GreGreeceece -- 1.0791.079 SpainSpain -- 1.4011.401 DenmarkDenmark -- 861 861 NorNorwayway -- 734 734 FinlandFinland -- 431 431 IrelandIreland -- 322 322 Romania (2003)Romania (2003) -- 299 299

Public budget contributions inPublic budget contributions in UE-15 UE-15 inin 2001 2001 [Nera Study, December 2001] [Nera Study, December 2001]

[Million [Million €€]]

6%

9%

36%18%

4%16%

11%

Fuel

Repairs

Electrical energy

Access Fee

Personnel Costs

Depreciation

Contracts with third parties

Acces Fee has a high Acces Fee has a high shareshare in total costs in total costs

Main costs elementsMain costs elementsat CFR Cat CFR Căăllăătoritori SASA inin 2004 2004

4%7%1%

2%

4%

9%

29%21%

3%

6%

8%

6%

Fuel

Repairs

Electrical Energy

Access Fee

Personnel Costs

Depreciation

Accounts with foreign railways

Financial Costs

Material Costs

Operation Costs

Contracts with third parties fordiferent servicesOther Costs

Acces Fee has a high Acces Fee has a high shareshare in total costs in total costs

Main costs elementsMain costs elementsat CFR at CFR Marfă Marfă SASA inin 2004 2004

The total infrastructure charge The total infrastructure charge for Railways Undertakingsfor Railways Undertakings

19919999 - 200 - 20055

1,55 1,61,27 1,23 1,21

2,422,61

3,74

4,334,434,464,56

4,88

4,18

0

1

2

3

4

5

6

1999 2000 2001 2002 2003 2004 2005

EU

RO

/tra

in k

m

Passengers Freight

NECESITY

TO AVOID CROSS-SUBSIDY

The dilemma of railways subsidyThe dilemma of railways subsidy

Subsidy in 2003 was 0,7 % from GDP The nominal value of subsidy is much

lower than the European average The costs of operation of passengers

services is close to the European level

Non-biased financial support of the Non-biased financial support of the State in infrastructure development ?State in infrastructure development ?

3535 %% of railway transportation of railway transportation tariffs are allocated tariffs are allocated to cover the access chargeto cover the access chargeof Railways infrastructureof Railways infrastructure

< 10 < 10 %% of auto transportation of auto transportation tariffs are allocated tariffs are allocated to cover the costs ofto cover the costs ofRoad infrastructureRoad infrastructure

The construction of business-The construction of business-oriented railway system must oriented railway system must continuecontinue

What to do ?What to do ?

The new tradition – The continuous change, The new tradition – The continuous change, innovation and updating work practicesinnovation and updating work practices

NEXT STEPS

NEXT STEPS

IN ROMANIAN RAILWAYS

IN ROMANIAN RAILWAYS

REFORM

REFORM

Integration of Romanian Railway Infrastructure Integration of Romanian Railway Infrastructure in the European network based on in the European network based on modernization and significant reduction of modernization and significant reduction of access chargeaccess charge

Participation of Romanian Railway Operators Participation of Romanian Railway Operators on the international logistic chain services by a on the international logistic chain services by a complete business process re-designcomplete business process re-design

The main challenges of the The main challenges of the European integrationEuropean integration

Lessons learnedLessons learned Once the restructuring process started, do not

stop changes, quick reaction to the market Define mixed solution function of specific

conditions (there is no guarantied successful approach)

Flexibility in implementation, do not ignore the feed back of the system

Cooperation with trade unions

Thank you for the kind attention !

Vasile Olievschie-mail: olievski@mt.ro