Romanian Railway ReformCase Study

Ray B. ChambersChairman

Seneca Group International

Seneca Group, LLC is an international consulting company specialized in rail transport industry.

Headquarters:Seneca Group, LLC - Washington, DCSeneca Group International - Bucharest

What consultancy Seneca offers?

1. Organizational Restructuring and Business Planning

2. International Project Management2. International Project Management

3. Transportation Policy Analysis, Reform and Development

4. Technical Assistance for Concessions and 4. Technical Assistance for Concessions and PrivatizationsPrivatizations

5. Logistics in transport field

6. New Technology Development and Marketing6. New Technology Development and Marketing

7. Executive Training and Education

Seneca International ProjectsTransportation Transactions – A Record of Creating Value

Company Transaction Value

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

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).

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 – 1st Seneca International Project

Wave of Reform Sweeps the Globe

• In Europe - EU Commission 91-440

• Sweden 1st to separate infrastructure & moves to operations privatization

• Germany, France and others begin some reform

• Britain – The Thatcher Government makes the Great Leap Forward

East European Rail - Downhill Slide

• 1990 - A New Regime - A hard transition

to a market economy

• 1997 - SNCFR Romanian Railway - 5th largest in Europe - 11,000 Kilometers of Track- Traditional Political Interference at all levels of

railroading

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?”

RomaniaBest 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)

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

RomaniaBest Practices

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

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

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

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

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

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

Romanian Rail System Planning1997

• 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

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

Principals of Reform

New Companies - Clean StartNo 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

The Plan Kept SNCFRThe 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

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

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

Best Practice #7Create 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

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

CFR Calatori - Passenger

Calatori’s role is:

• Local & Long Distance Passenger Service

• Design & Marketing Service (Design & Quality)

• Locomotive & Coach Maintenance

• Safety, Security and Claims

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

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

Best Practices in RomaniaSummary

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)

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

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

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