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Global Perspective on UK Privatization - Fundamentals |
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| Taking a simplistic approach, there are really two main elements of what drives
success in business. One is revenue, and the other is costs and I would
submit, based on the experience in the USA and Argentina and other
countries, revenue is more important than costs. I know that railways
have historically been cost focused, but if you look at why railways
have failed in our country and other countries, it's usually been due to
revenue shortfalls, not cost overruns. The reason is that you can't
control your revenue nearly as much as you can control your costs,
especially when you're serving smokestack industries that are declining.
Let's examine the three elements of revenue: Competition, Market Share and Traffic Base. |
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In the USA the main competition is between railroads. The market share is mature in that we hope to get more market share but it's not going to be double digit improvement; it's going to be single digit improvements if we are extremely successful. The traffic base that we serve is mature. There are no major structural changes awaiting us in the US market that we can foresee. In Latin America, by contrast, the competition is only truck because for example, we are the only railway that runs from Brazil to Argentina. The market share is low because when these railways were privatized they had basically stopped operating, so there is no place to go but up. The traffic base is expanding. If you've read anything about the economy in the southern part of South America, there's a lot of good news coming out as industries restructure and take more of a foothold in the global economy. By comparison, in the UK the competition will be other railways. It will be more competitive than the USA, because in the USA other railways compete on their own separate tracks so they have different cost and service characteristics. The Iowa Interstate is one of four railways between Chicago and Omaha, but we're responsible for our own infrastructure and we have different cost characteristics. In the UK, my understanding of open access is that everybody will have the same track costs. They're using the same infrastructure plus or minus what you can negotiate with the Regulator. In terms of market share, it's relatively mature. Yes, there is the prospect of intermodal and there are anecdotes about growth in traffic but relative to what we see in Latin America it's a relatively mature market. The traffic base is more or less mature. On the cost side I would say that we are in very good shape in the US. We have good infrastructure, good rolling stock, lean staffing levels and mature railway capital markets that allow us to reinvest because we have the markets for equity and debt that it takes to bootstrap ourselves into better shape. In Latin America, the railways are generally in poor shape, they require investment, the capital markets are just emerging but I would rather have a cost problem than a revenue problem. We can manage our way out of it. In the case of the UK, there is an excellent infrastructure, good rolling stock, relatively high staffing levels, and emerging railway capital markets. It's a mixed bag, but my focus is more on revenue than on costs. So I would say relative to other parts of the world, the structure of the UK privatization has a lot of problems. Again, relative to other parts of the world. |
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| Valuing the Freight Franchises | |||||||||||||||||||||||||||||||||||||||||||||
How do you value a freight franchise? I'll begin by making a controversial statement, "Under Open Access a franchise is not a franchise at all, because you have intramodal competition, that is rail versus rail, which is likely to minimize profit margins once Open Access takes hold." I've been spending a lot of time the last couple days asking people to please tell me I'm wrong. Tell me that the customers will not insist that each of the trainload freight companies bid against each other for each contract as it rolls over. I haven't heard anything that eliminates that concern. I'd also make the point that despite the mature markets, revenue projections are going to be more risky going forward given the unknown structural impact of Open Access. What is the timing of when the contracts rollover, and how opportunistic will the customers be in terms of forcing your pricing down to breakeven levels? The only analogy I can come up with for what is about to happen in the UK is the US domestic airline industry, which is the best model of Open Access. You've got the prospect of the same competitive and financial results awaiting, unless I'm wrong. To summarize: |
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Structuring for Competitive Advantage |
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What really makes privatization work is a motivated seller, followed by strong local partners, followed by commitment and flexibility, and finally the ability to bridge cultural gaps and work together in a good business structure. Now, in the particular case of the UK I am firmly convinced that the seller is motivated. This is an unstoppable process; the train is leaving the station and it's just a question of who's going to be on it. In terms of local partners, there is no question that there are plenty of savvy venture capital firms in the UK and plenty of experienced railway managers. So that's not a concern. There's a commitment and flexibility that I sense in terms of people genuinely committed to bidding. The cultural elements are where groups often fail and I think that it's seductive to believe that just because we speak the same language that we don't have a lot of potential for misunderstandings. I know that in our bid for New Zealand it was not until months and months into the process that we really got to know our partners and understand what great business people the Kiwis are. I have never met a more savvy, competitive, hard-charging bunch of people in my life. I think a lot of that has to do with their being in an isolated location and being very good at trading. We as a country tend to be very insulated because we are so big; a lot of us don't even have passports. So, when you get down to the bottom, you see marketing and technical and the kind of things that are more railway skills than the points at the top. But let me stop de-emphasizing the value that an overseas partner brings and say that you also need railway skills -- railway skills that are a different perspective perhaps than what has traditionally been seen. |
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