The World Bank
Restructuring of China Railways: Implications for India?
Louis S. ThompsonRailways AdviserThe World BankMarch 1, 2002New Delhi, India
2The World Bank
General railway restructuring trends and issuesCurrent thinking in China – implications for India?Restructuring in Indian Railways:? Is the Chinese experience useful?? Is Indian restructuring necessary?? Options and choices? Getting started
Restructuring of Ministry of Railways of China: Implications for India?
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General railway restructuring trends and issues (1)
Separation of “Government” from Enterprise: MOT, not MORSpinoff of non-core activitiesEncouragement of competitionShifting the public/private balance: the public plans, provides social resources, private sector operates, sometimes under contract with public
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General railway restructuring trends and issues (2)
Clear separation of rail commercial functions –accounting and/or institutional? US and Canada: formation of Amtrak/VIA,
deregulation, restructuring of Conrail? EU: separation of infrastructure from services,
separation of services (freight, intercity passenger, “social passenger”), required contracts for social services, competition for contracts, removal of old debts
? Japan: separation of JR freight, creation of 6 passenger companies
? Similar process nearly everywhere
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Directions of Railway ChangePrivate Involvement
Stru
ctur
al C
hang
e
Mixtures and partnerships are possible!
Public Ownership
Partnerships: Concessions or Franchises Awarded Private Ownership
Integral
China, Russia and India (ministries), MAV, SRT, MZ, others, (SOE's)
Argentina (13), Brazil (9), Mexico (5), Peru (3), Guatemala, Bolivia (2), Panama, Cote d'Ivoire/Burkina Faso, Cameroon, Congo (Brazzaville), Malawi, Madagascar, Jordan
New Zealand, Ferronor (Chile), CVRD (Brazil), A&B (Chile)
Dominant Integral, Separated Minority Operators
Amtrak, VIA, Japan Freight
Mexico City suburban, CONCOR (India)
US Class I, CN and CP, East/West/Central Japan Railways
SeparationE.U. and Chile passenger
Swedish suburban, FEPASA (Chile), LHS line (Poland)
U.K. franchises and EWS, Polish and Romanian freight
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Current railway thinking in China – implications for
India: MOR’s Problems
Confusion of government and enterprise rolesGeographic organization causes? fragmentation of traffic and decisions (but ~60 percent of freight
moves inter Administration)? bureaucratic decisions (revenue distribution, wagon allocation)
made at the center ? 14+ points of management ? no competition in rail transport (>70% of freight)
Organization for production, not market? no Lines Of Business, no costing information? “command and control” mentality? no price mechanism (flat tariff structure)
Non-core distractions (e.g. factories, restaurants)Imposed social role (e.g. schools, hospitals)
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Lanzhou
Beijing
Jinan
Shanghai
Nanchang
Guangzh
ou
Kunming
Liuzhou
Zhengzhou
Wulumuqi
Chen
gdu
Huhehaote
Shenyan
g
Haerbin
Today:14 Administrations19.7 million wagons interchanged276.4 million passengers interchanged
Lanzhou
Beijing
Jinan
Shanghai
Nanchang
Guangzh
ou
Kunming
Liuzhou
Zhengzhou
Wulumuqi
Chen
gdu
Huhehaote
Shenyan
g
Haerbin
Today:14 Administrations19.7 million wagons interchanged276.4 million passengers interchanged
Organization of MOR today
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Broad change themes in ChinaSeparate MOR’s enterprise functions from its Government functions – eventual creation of an MOTRestructure the enterprisesMake the enterprises commercialSpin off all non-rail activities (manufacturing as well as social) and make them independent
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Separating enterprise from Government
Today’s MOR becomes “ministry” eventually combined with other transport functionsMinistry will plan national investment strategy, oversee infrastructure dispatching and scheduling, regulate tariffs and safety, oversee revenue divisionsToday’s Administrations will become enterprises, wholly owned by GovernmentAll non-rail commercial spun off from MOR (Done) and eventually some from Government as wellAll social transferred to appropriate GovernmentThese are agreed and committed in principle
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Restructuring the enterprises and making them commercial (1)
First step: Administrations will become enterprises, with separate profit centers for passengers (PTEs), freight (FTEs) and cost center for infrastructureSecond step: existing 14 enterprises will likely be combined into 4 or 5 (still under study)Third step (alternatives under study): institutional separation of PTEs and FTEs (less likely) from infrastructureFourth step: redrawing the boundaries of PTEs or FTEs to reflect the market for transport
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Percent of Rail Passenger Traffic to Total Rail TrafficP-Km/(P-km+T-Km)
0102030405060708090
100
CA
N
USA
ES
RU
SLVE
SLK
C
HIN
AFIN
CZ
PL
S A TU
R
RO
B
HU
D F IN
D
E I P UK
KO
R
DK
IR
L
NL
EL
JPN
FREIGHTDOMINANT
PASSENGERDOMINANT
“Balanced”
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Lanzhou
Beijing
Jinan
Shanghai
Nanchang
Guangzh
ou
Kunming
Liuzhou
Zhengzhou
Wulumuqi
Chen
gdu
Huhehaote
Shenyan
g
Haerbin
Four Freight Railways:8.7 million wagons interchanged
North
West
Central
South
Lanzhou
Beijing
Jinan
Shanghai
Nanchang
Guangzh
ou
Kunming
Liuzhou
Zhengzhou
Wulumuqi
Chen
gdu
Huhehaote
Shenyan
g
Haerbin
Four Freight Railways:8.7 million wagons interchanged
North
West
Central
South
19.7
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Restructuring the enterprises and making them commercial (2)
Create rail/rail competition by:? Trackage access rights? Redesign of service territory? Creating parallel tracks in selected markets? Creating source competition? There is debate on thisInvolve private sector by:(agreed measures)? Branch line ownership and operation (many)? Focused market operations (Guangshen) or
containers? Wagon ownership and leasing
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Jinan
Guangzh
ou
Lanzhou
Beijing
Shanghai
Nanchang
Kunming
Liuzhou
Zhengzhou
Wulumuqi
Chen
gdu
Huhehaote
Shenyan
g
Haerbin
Source Competition: 5 Administrations
Beijing jointly owned by the other four groups and operated as neutral connection
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MOR’s Restructuring:Issues and Approaches
Separation of enterprise and government -- establish an MOT, set up railways as enterprises, initially at Administration level
Commercial approach -- Line Of Business (LOB) organizations at all levels --freight, passenger companies,and related infrastructure
Rail enterprise structure -- full separation versus freight integral and passenger separation (US model) or fully integral models on 14 Administration or regrouped (5 Administration) basis
Market structure organization -- mergers of PTE’s and possibly FTE’s across Administration boundaries (infrastructure likely set up at Administration level, though other structures are possible)
Competition -- could have parallel/competitive infrastructure, but more likelywill be competitive trackage rights or source competition, if any
Private sector involvement -- non-core and local lines may be sold (Guangshen), private equipment ownership probable, specialized operators possible, generalized privatization not on the horizon (if ever)
Transition -- holding companies at the regrouped Administration level
Overall -- cautious, “experiment”-based approach, with many compromises and mixes (as always) – committed and unstoppable
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MOR Restructuring: AnalyticalTools for Evaluating Options
TMIS -- traffic, routing operating and revenue data (operational)Traffic costing models -- use basic data to estimate cost and “contribution” of traffic on shipment, commodity, line segment and area basis (operational)PC-based network models -- for traffic flow analysis (initial version operational)Next challenge: integrating TMIS data with costing and network models for rapid and accurate system analysisPC-based financial planning models -- to permit rapid analysis of cost and revenue scenarios
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Restructuring IR: is the Chinese approach relevant?
Similarities with China? Enterprise/Government role confusion -- politics? Regional monopoly structure, not market driven? Imposed social functions, large non-core activities
In other ways, India is different? Variations in Zonal characteristics ? Three gauges in India, one in China? Suburban operations (2000 trains daily)? Destructive freight-to-passenger cross subsidies? Much greater deferred maintenance, especially wagons
Clearly, India will need its own mix of ideas
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Is Indian Railway restructuring necessary? The Mohan Report
Financial Crisis is looming -- need to act sooner rather than laterLack of clear purpose and autonomy (government agency, not commercial agency)Lack of Customer focus -- IR has three markets (freight, intercity passengers and suburban passengers) and needs differentiated organizationOutdated business structure : confusion of government and commercial, too much vertical integration, large inefficienciesFreight market share is down and falling (low quality, overpriced caused by freight cross subsidy to passengers)Large backlog of investments which cannot be funded under the current setup (government has no money)Missing: Clear Indian Objectives
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Mohan Report: Principles of Restructuring
Broad changes:? separate railway from government (create MOT and regulator),
Separate policy, regulatory, management? manage railway commercially (LOB organization)? Focus on core, spin off non-core (no mention of privatization)
businesses and social activities? Bring in some outside skills and management
Marketing:? Freight -- better quality of service, lower tariffs, competition? Passenger -- rebalance passenger tariffs
Improve efficiency (accelerated reduction in manpower (25 percent) with safety netFinancing including private sectorRecast accounts in structure and with Indian GAAP
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Places to start: where the World Bank could help
Overall policy framework is goodAccounting work to install GAAP, construct LOB accounts and define PSO paymentsInvestments in IT hardware and systems neededFormulation of Government and Regulatory functions and agenciesAnalytical assistance in structure of new organizations (traffic flow studies to analyze need to redraw zonal boundaries, set up specialized companies, establish competition, etc)? Separate suburban operations? Assess current Zonal and operating enterprise structure
Support in valuation and spin off of non-core (commercial and social)Labor analyses and safety net programsAssistance in spin off of branch linesAppropriate physical investments identified during restructuringanalyses
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What Has the World Bank Done?Restructuring analyses, analytical tools and TAAsset rehabilitation to support new structureLabor transitions and retrainingResettlementEnvironmental cleanupSupport changes in structure (suburban devolution, creation of management and accounting systems)Investment in appropriate private operators (Concor)
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Zonal Railways Are Different:Freight Ton-Km as Percent of Total Traffic
0
10
20
30
40
50
60
70
80
N. Eastern
Southern
Central
Western
N. Frontier
Northern
Eastern
S. Central
S. Eastern
IR Average
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The Gauge Effect:India’s Three Separate Railways
5.80 0.3
25.3
3.28.5
68.9
96.891.2
0
10
20
30
40
50
60
70
80
90
100
Narrow Gauge Meter Gauge Broad Gauge
% line-km% t-km% p-km
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IR’s Suburban Activities(Passenger-Km in 000,000)
0
5
10
15
20
25
30
35
Mumbai Chennai Calcutta
Central
Western
Southern MGSouthern BG
Eastern
SouthEastern
2000 trains daily
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Suburban Rail Systems:Annual Passengers Per Km of Line
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
JohannesburgCape TownPretoriaRio:CBTU-RJSao Paulo:CPTMBA:M
itreBA:Sarm
ientoBA:RocaBA:San M
artinBA:Belgrano Sur
BA:Belgrano Norte
BA:UrquizaBA:SubteM
exico CityBangkok Skytrain
Mum
bai:CentralM
umbai:W
esternM
adras:SouthernNew York City:LIRR
Tokyo:JR EastTokyo:KeikyuTokyo:KeiseiCairo M
etro
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Employee Productivity is Relatively Low(000 Pkm+000 Tkm/Employee)
0
200
400
600
800
1000
1200
1400
Bangladesh
Indonesia
Korea
Malaysia
Thailand
Vietnam
Philippines
China India
Pakistan
Sri Lanka
Austria
France
Greece
Sweden
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Average Annual Output per Freight Wagon is Not High(000 Tkm per Wagon)
0
500
1000
1500
2000
2500
3000
Bangladesh
Indonesia
Korea Malaysia
Thailand
VietnamPhilippines
China India
Pakistan
Sri Lanka
Austria
France Greece
Sweden
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Ratio of Wage Costs to Revenues
0
10
20
30
40
50
60
1980 1985 1990 1995 2000
India China US Class I
%
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IR Ratio of Average Passenger Fareto Average Freight Tariff Is Very Low:
IR’s Destructive Linkage With High Passenger Share
4.1
BG Inter cityBG Sub’n
0
0.2
0.4
0.6
0.81
1.2
1.4
1.6
Bangladesh
Indonesia
Korea M
alaysia
Thailand
Vietnam
Philippines
China India
Pakistan
Sri Lanka
Austria
France
Greece
Sweden
MOR’s “escape”
Total
IR’s dilemma
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IR’s Program: Initial ActionsIR as enterprise separated from government --enterprise under commercial rules (profit motive, business Board with outside involvement and private sector personnel rules)Existing Zonal Railways adopt LOB organization on an accounting basisSeparate and localize suburban operations -- accounting first, then institutionalSpin off social, non-rail activitiesMake manufacturing activities independent and competitive, then privatize (if and when)
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IR Restructuring:Medium Term Actions
Separate out NG and localize, concession or privatize the piecesFinish high MG priority pieces, localize, concession or privatize the unconverted piecesLocalize, concession or privatize BG “bits and pieces”Create local (accounting separation at first) companies to operate local, short haul passenger companies (4800 trains daily). Mumbai, Kolkata, ChennaiCreate accounting-based LOB’s at national level for freight and long-haul passengers (1200 trains daily)Consider more specialized companies like CONCOR (commodities, value-added services) with private involvement
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IR Narrow Gauge Lines Compared With Smaller Operating Concessions(gold = line-km, blue = traffic density in TU/km)
0
500
1000
1500
2000
2500
CH: Arica-La Paz
BO: Andina
CH: FERRONOR
PE: Southern
PE: Southeastern
BO: Oriental
PE: Central
BO: Chiapas
BR: Novoeste
BR: TCJordan
N. Frontier
Western
Central
Eastern
S. Eastern
Northern
IR NG Lines
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IR Meter Gauge Lines Comparedwith Middle-Sized Operating Concessions(gold = line-km, blue = traffic density in TU/km)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
AR: Belgrano
AR: Roca
AR: FEPSA
AR: Mesop.
AR: BAP
AR: NCA
C'I/BFBR: Novoeste
BR: FCA
BR: FSA
ME: Sudeste
BR: FEPASA
ME: Nordeste
N. Frontier
Northern
S. Central
Western
Southern
N. Eastern
IR MG Lines
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Three IR Markets: the Impact of LOB Focus and Private InvolvementTraffic Volume Index: 1994=100
80
100
120
140
160
180
200
90 91 92 93 94 95 96 97 98
CONCORPassengerFreight
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Km of Line: MOR Administrations Compared with IR Zones
0
2000
4000
6000
8000
10000
12000
Wulum
uqiHuhehaoteKunm
ingLiuzhouJinanGuangzhouNanchangLanzhouChengduShanghaiHarbinZhengzhouBeijingShenyangN. FrontierEasternN. EasternSouthernCentralS. CentralS. EasternW
esternNorthern
Total BG
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Inter-city Passengers Originating (000,000): Comparison of MOR Administrations with IR Zones
0
50
100
150
200
250
300
350
400
450
NanchangW
ulumuqiKunmingLiuzhouHuhehaoteLanzhouGuangzhouChengduJinanShanghaiHarbinZhengzhouShenyangBeijingN. FrontierS. EasternEasternS. CentralN. EasternSouthernCentralW
esternNorthern
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Freight Tons Originating (000,000): Comparison of MOR Administrations with IR Zones
0
50000
100000
150000
200000
250000
LiuzhouHuhehaoteKunmingW
ulumuqiLanzhouNanchangHarbinJinanChengduShenyangZhengzhouGuangzhouShanghaiBeijingN. EasternN. FrontierSouthernW
esternNorthernCentralS. CentralEasternS. Eastern
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MOR’s Freight Orientation:Percent Passenger TrafficP-km/(P-km+T-km) in %
01020304050
6070
80 82 84 86 88 90 92 94 96 98 0
India China
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Freight Traffic(billions of ton-km)
0
200
400
600
800
1000
1200
1400
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0
Year
India China Conrail
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Passenger Traffic(000,000 p-km)
050
100150200250300350400450500
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0
India China
Russia Japan
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Percent of Originating Tons -- 1997
0
10
20
30
40
50
60
70
Shenyang
Beijing
Shanghai
Chengdu
Lanzhou
Average
Kunming
JinanHaerbin
Zhengzhou
Guangzhou
Liuzhou
Nanchang
Huehaote
Wulumchi
% Intrazonal% Intra Admin