Antti Talvitie. Workshop remarks. Bucharest April 22, 2002.

Romanian Railways Workshop.

Acknowledgments: Minister, etc.

Introduction

On behalf of the World Bank I welcome you to this workshop on managing the Romanian railways. This is a very opportune time for us to meet. It is opportune time because it is the kick-off event for putting in operation together all the goods and services acquired under the World Bank supported loan for the Railway Rehabilitation project. The costs have been substantial, a total of US$ 250million in loans, of which the World Bank loan is US$120 million, and which the Borrower has to pay back. This is also opportune time to have a workshop because I believe management is the key to do this putting together and operation of what amounts to a repositioning of the Romanian railways to serve a market economy and to operate it under a competitive regime.

The restructuring of the Romanian railways, the overarching objective of the WB project, is a substantial undertaking. Nowhere it has been done in one or two years. A better yardstick is of whether it is done in less thana decade or in over a decade. I believe those things that we can now see, can be done in less than a decade. But it is not a foregone conclusion that they will be done in less than a decade.

I am the World Bank Task Manager of this project. Although the Bank has numerous operational directives, guidelines, policies and safeguard policies, there is no codified technique how to the task managers should work to help you achieve objectives and results on the ground. In general, my rule has been one of observation and generating interest and discussion among you and of not micromanaging the project or saying out loud, beyond generalities, how I see the situation of the Romanian railways.

I will now depart from this mode of operation. I will tell both how I try to work with you and what I think are the key issues for the Romanian railways. Both of these can be wrong: my way of working with you may not produce the results you desire, and the way I see your problems maybe also be incorrect. Be it as it may, at least you will know. However, I do not want that we devote the next two days to discussing my problems, but we devote them to discussing your problems as you see them.

How do we work together?

I will first describe how I do not work with you (figure 1). The usual way of planning and implementing projects is worked on as an objective-oriented approach. In that approach, an objective or objectives and associated impacts are defined and agreed upon and then activities are developed to achieve this objective and impacts. Whenever resistances appear or are anticipated, maneuvers are undertaken to avoid them, to go around them, or simply to plough through them in order to reach the objective, the results on the ground. That the objective and impacts are achieved is determined by performance indicators that have also been agreed in advance.

I try to work with you in a different way. I call it experiential incrementalism (figure 2). It is experiential because it uses our experience, yours and mine, to articulate problems and approaches to their resolution. It is incremental because it advances step-by-step without a grand design because not everything can be known in advance. There is no reason that there could not be long range goals, but they are not ‘fix ides’, nothing that we could not change our minds about. In this model, there may be objectives, and there surely are problems and ills that we would like to see go away. These, the resistances, prevent us, you and me, from achieving what you want to achieve, including the determination that what you want to achieve is reasonable, realistic, and, in the final analysis, desirable.

This model is deceptively simple, so simple that it is most difficult to put into practice. According to it, all objectives problems, resistances, including anticipated side-effects, whatever, are discussed openly and thoroughly together in the management team, among yourselves. Outside stakeholders should be consulted as appropriate. If such open discussions do not take place, problems will persist and will not be resolved; it is even possible that new problems are created. It might be helpful if you had a skillful consultant––or a skillful task manager––to help you in these deliberations. However, the role of the consultant or outside task manager is not to lecture and give talks, but primarily to ask questions and clarify issues. Talking and deliberations should be done by you.

The model has several corollaries. First, several problems can be discussed at any one time, or in any sequence, including back-tracking. Second, if a problem is avoided or gone around, unintended side-effects will appear that may be detrimental. A famous development economist Albert Hirschman claims, after reviewing numerous World Bank projects in several continents, that the unanticipated side effects were the most important effects. He called his discovery “the centrality of side effects”. Third, if we ignore these side effects, and pursue toward our original goal, the side effects do not cease to operate in the society. Fourth, and this is my theory, that if a resistance is discussed from all angles, including the affected interests, then it is possible to remove it, achieve a (perhaps changed) objective, called ‘cure’. That removal may entail addressing and developing programs to solve other resistances or side effects.

This workshop is designed to follow this model. Its success depends on that you co-operate by describing the problems as you see them, contribute your solutions even if they are still simply ideas. But, above all, this workshop’s success, and your success, depends on that you talk.

Past and present

Before I describe my view of the issues you face, a historical review is useful to us all.

The reorganization of Romanian State Railways (SNCFR) started in 1995 when the World Bank’s loan (Romania) Railway Rehabilitation project was being prepared. There was parallel financing from the EBRD and from a PHARE Grant. An important component in the loan was the restructuring of SNCFR, which at the time had app. 141,000 employees. In 1998, SNCFR was split into five companies: (1) the infrastructure company (CFR-SA), (2) the freight operations company (Marfa), (3) the passenger operations company (Calatori), (4) the rail management services company (SMF), and (5) the rail asset management company (SAAF).

In 1998, a railway regulatory organization, AFER, was created as part of the restructuring to be responsible for the development and enforcement of regulatory standards, railway safety, inspections, licenses and research. The year 1998 was an important milestone also for restructuring; some 30,000 employees accepted a voluntary separation, track was reduced by 3500 km, and nearly 400 stations and halts were closed (table 1). Table 1 also tells that there has been a substantial reduction in track maintenance expenditures. It is a fair surmise that the railway track has deteriorated and require reductions in the operating speeds of the trains.

There has been a substantial reduction in traffic since 1995 (table 2). Passenger traffic declined by about 40 % over the period 1995-2001 and the freight traffic, by about 42% between 1995 and 1999. The positive news is that freight traffic has started to increase in the last two years. The freight company has also been profitable until late last year (2001) when private operators which were earlier granted operating licenses and access rights successfully won important contracts and caused a decline in Marfa’s profitability and ultimately to a loss making freight railway. Table 2 also conveys some other positive news: the railway operating companies have been able to increase their unit revenues in real terms. Marfa has freedom to set its tariffs, while Calatori’s tariffs must be approved by the Ministry. Historically, Calatori’s tariffs have been very low for social reasons, and still are; and the approval process for tariff increases has not kept up with the costs and inflation. Finally, table 2 informs us that there is substantial budgetary support for the railways, approximately 0.6% of the GDP. Recently, the Government is trying to hold the subsidy at the same nominal level, which is a reduction in real terms.

These, then, are the good news (table 3): the State Railways have been reorganized and restructured; (some) commercial principles have been introduced to management; there has been a one-time adjustment in the physical plant and staff; there has been continued loan support for upgrading the physical plant; financial management systems are in place, although, unfortunately centrally at SMF; and finally but very importantly, the integrated railway information system (IRIS) and its backbone telecommunications network, costing together some US$65 million, acquired through the World Bank loan, is being rolled out and taken into use.

There also has been management training, provided through the parallel loans; more management and leadership training will be given in the next 12 months. Taken together, all the elements are in place for the restructuring to yield its intended benefits and rewards.

Table 4 tells in a nutshell the bad news: since 1998, restructuring has stalled and the Banks’ and the IFIs’ and donors’ efforts to move it along have not succeeded.

What are the key issues to be resolved for continued restructuring ?

In brief, the answer is that I believe I know the key issues, but I do not know how to help you to resolve them (table 5). There is strong and effective resistance. In large part this resistance is successful because Romania has a difficult macroeconomic and geopolitical situation. Romania’s railway issues cannot be solved the way it wants to solve them because Romania is not rich enough; and, Romania is not rich enough (partly) because of the way it attempts to solve them. The resistance is however, multidimensional. Geopolitically––an important dimension for the future of Romania––Romania’s political objectives are such that they keep it from addressing the key issues, or what we believe to be the key issues, in transportation and in macroeconomics.

What are the key issues as I see them?

It is worth writing down the key railway issues, and then commenting on each of them. I believe all the issues can be resolved. This must be done gradually––that means starting now––to avoid adverse side-effects. A good target time is a decade, that is, before 2007.

•Lack of commitment and incentives to cost cutting. – There are increased arrears to the state; deferred maintenance; lack of progress in performance.

•Lack of freedom to manage and lack of management experience. – Political interference; too much management; too many managers; and, perhaps, too many companies.

•Bartering service to large state owned companies – coal, steel, electric generation.

•Unreasonably high, non-competitive levels of passenger service.

•Too large physical plant – or the country is too small. Resistance to reduce the physical plant.

•Costly safety standards and their application.

•Free access to competitive operators was granted too early – The freight company went into Red!

•Privatization was made an objective too early.

•Not enough discussion together what the problems are and how to approach them.

The general lack of commitment to cutting costs, with the possible exception of Marfa , is multi-layered and manifested by the lack of incentives to cut costs. On one hand, costs cannot be cut because staff cannot be reduced without jeopardizing the safety standards for safe railway operation on the entire track. And, on the other hand, track cannot be reduced because that would leave the available manpower idle; track reduction would have only marginal effect on cost reduction because its maintenance costs are already at minimum. This has several consequences. The most important are that railway management does not gain experience to manage in a competitive environment and that the current track access charges have no incentive for anyone to reduce costs because they are a percentage of revenue. This in turn has four other consequences: (1) it penalizes Marfa who pays more than its use of track would indicate; (2) it enables CFR-SA not to rationalize its track, and which rationalization would of necessity lead to adjusting staff to the reduced level of supply; (3) it has enabled, because of transparency requirement, competing railway operators to cherry-pick good customers and services; and (4) the collected cost and travel demand data do not support the development of good track access formula

There is little to no freedom to manage and there is also too much management. Political interference is especially obvious in passenger traffic. But, it also influences track abandonment, staffing levels, and so on. Management skills also need improvement. . The only remedy to acquire such experience is to manage in a market environment. A question has also to be asked if there are too many companies and too many managers; to an outside observer the answer to that question is affirmative. The multiplicity of managers prevents effective discussions and effective management. The managements of the companies need to know and understand each others’ problems and issues. How such understanding is achieved may be a very difficult problem.

Bartering of freight railway services to SOEs is a symptom of an ill that influences the railways ability to make payments and prevents its management to operate the railways rationally. Marfa hardly is free to manage its operations by refusing to serve large SOEs. That would be a political suicide. Nonetheless, bartering must end for the good of the railways—the sooner the better.

Calatori may have a mandate to operate certain services, but its track charges do not reflect the costs of those services. In its business planning, rail passenger service levels in wealthy European countries may influence Calatori too much. Calatori should investigate whether private bus companies could offer comparable service at lower cost.

It already has been mentioned that the physical plant is too large for the level of rail demand in Romania. However, again, for political reasons track abandonment has not even been attempted and no analyses has been carried out which tracks and services are unprofitable and could be replaced by truck or bus services.

Safety standards and other regulations reinforce the resistance to reduce staffing levels. Simply put, existing standards and length of the track predetermine the level of staffing.

It can be argued that access rights and operating licenses were granted too early to competing private operators which do have freedom to manage. The state railway companies simply were not ready to compete. The main reasons are already mentioned above. This is of particular concern to the World Bank and the Borrower alike which has a large investment in IRIS and its backbone telecom network. These monies have to be paid back.

Finally, privatization may have become an objective too early. An intermediate objective would have focused on making the railways efficient and free of political interference, competitive in one word. That accomplished, at least Marfa could have been privatized. It also might have been wise to grant this new private company a grace period to operate without competing railway operators for a short period of time, say 5 years.

Where do we go from here?

The World Bank team continues to work with the Romanian railways with these hypotheses, and with new hypotheses that may emerge in the next two days. The objective is to achieve the broad goal: efficient and competitive railways that can serve the Romanian industries and passengers well and at prices that they can afford.

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