|
CONFESSIONS
OF A MONOPOLIST: |
|
|
CONFESSIONS
OF A MONOPOLIST: |
|
SPEECH DIRECTORY: BACKGROUND ON RDC USA Argentina Guatemala Peru Malawi / Mozambique Estonia TYPICAL CHALLENGES Operational Safety Cultural Case Study: Guatemala Financial Macro STRUCTURAL & FINANCIAL CONSIDERATIONS CONCLUSIONS Q & A SESSION |
|
|||
 To
print this speech, you must have Adobe® Acrobat® Reader® installed or download
free software version.
|
||||
| Thank
you, Adrian. It is an honor to be here and I’d like to return the
compliment and say that I had heard about this guy Adrian Shooter for
many years from many people who said that he was one of the best railway
managers in the UK; that’s why I made it my business to introduce
myself to him.
Fortunately we had a mutual friend and he knew that I was not
100% crackpot – maybe 50% crackpot – and as they say, “The rest is
history.”
Now let’s get started. My understanding is that the RSA is for the most part an industry group, so I would like to tailor my remarks to the audience. The last time I gave a talk on this subject in England was approximately 1995, when the railways were first going through privatization. At the end of this presentation, I will give you our website address and if you’re curious, you can view my remarks from then. I will leave it up to you to decide as to how it really worked out versus the way I thought it was going to work out at the time. The title of this topic has been chosen not necessarily to generate controversy, but rather to highlight the fact that I come from a much different environment than the UK. In particular, I come from an environment where the vertically integrated railway is the business model. I would go so far as to say that I don’t know a lot about the details of how things work in the UK, so you should take my comments in that context. First I will provide some background on RDC, followed by some examples of the challenges we face in our business; take a big-picture approach in terms of looking at the structural and financial considerations of at least the vertically integrated railway; and then draw some conclusions. My goal is to conclude in such a manner that there will be sufficient time for questions and answers because that is what I personally will get out of this evening — the ability to interact with people from the UK rail industry. I am hoping that some of the things I am about to say will be wrong so I will come away with some new knowledge of your industry. |
||||
|
Background
on RDC RDC is a private company based in Pittsburgh that invests in and manages railways. We are a small company with 5½ full-time employees. We describe our business as Emerging Corridors in Emerging Markets, which means in some cases not just railways, but also railways and ports; railways and pipelines; or whatever we can do to generate economic activity. Consistent with Adrian’s theme for the RSA of “Partnership”, let me twist the words around slightly and say that in our context, partnerships take the form of Joint Ventures. Joint ventures will be the theme throughout this discussion. |
||||
|
USA Our base business in the USA is the Iowa Interstate Railroad in which RDC is a minority shareholder. Adrian shared with you that I worked for the Rock Island Railroad in the 1970s and at that time it was a bankrupt railroad which shortly afterwards liquidated. In the late 1970s, 25% of the rail mileage in the USA was in bankruptcy, which is one of the reasons that the railways were deregulated and allowed to “sink or swim”. In 1984 pieces of the liquidated Rock Island were stitched back together as the Iowa Interstate Railroad in order to restore the through route from Chicago to Omaha. Interestingly, this route is paralleled by three bigger and much stronger railways – Burlington Northern Santa Fe, Canadian National and Union Pacific. Why would you have a fourth railway between Chicago and Omaha? That would be comparable to having a railway from Marylebone to Birmingham competing with the West Coast Main Line. I think the answer is the same reason that Chiltern has been so successful. You’re not necessarily going after the Birmingham to London traffic, but rather the intermediate points. Adrian is the “monopolist” as far as passenger service to Ayelsbury; we are in a similar vein as far as Newton, Iowa. The Iowa Interstate goes across the central part of the USA, serving the major intermediate markets. While we do not particularly compete for Chicago to Omaha, we do compete for Des Moines to Chicago and Des Moines to Omaha in terms of freight traffic.  I
show a picture of our local freight as opposed to the usual publicity
shot of the road train with five locomotives and double stacks, etc.
because our bread and butter really is serving private-siding customers
– individual wagonload customers, one at a time – as opposed to
running the through trains. A lot of Iowa Interstate’s traffic
originates or terminates on branch lines served by trains that are very
short.
|
||||
Argentina Our
first involvement overseas came in 1991 when RDC was first contacted by
the Argentines. As I said before, we are a company with 5½ employees.
At that time we were the largest and most substantial company that was
willing to talk with the Argentines because nobody in the US had been
there and no one understood what was contemplated. I had been in
Argentina as a tourist and we basically immediately made a deal with the
people who turned out to be our original partners and the rest is
history. |
||||
Guatemala Our most challenging business has been reviving the abandoned national railway of Guatemala. The railway was abandoned in 1996, despite their having a privatization program which was never completed. It was put up for bid in 1997 and RDC was the only bidder. We began restoration work in 1998 just in time to get wiped out by Hurricane Mitch; we finally got the railroad opened toward the end of 1999. Ferrovias Guatemala is an extremely challenging project because it was an abandoned national railway and actually there are parts still abandoned. We are operating the Guatemala City-Atlantic line – moving import steel from the Atlantic, containers in both directions, and run one train per day. We hope to reopen the rest of the railway in pieces, focusing on reopening the Mexico line. Because the economics are so marginal in this project, we were able to negotiate the right for fiber optics, pipelines, etc. None of this has happened yet, but it was apparent that this railway will not survive on its own and since the government had no money, the rights for real estate type activity (fiber optics, etc.) were included in the concession. The partnership in this case is truly bootstrap capitalism; our shareholders are approximately 50 Guatemalan investors and Ferrovias Guatemala is one of six non-bank companies that is traded on the local stock exchange. |
||||
Peru Literally our most high-profile business is the Central of Peru — another British-built, British-owned railway earlier in the last century. Ferrocarril Central Andino is the World’s Highest Railway and operates 3 miles into the Andes. This has been an extremely successful business for RDC and we have UK partners (Commonwealth Development Corporation), as well as Peruvian investors and other investors whose names you will recognize like Mitsui. Interestingly, we restored passenger service on this railway purely for the profit motive in the middle of 2002 and it serves the tourist market with a monthly tourist train. |
||||
Malawi / Mozambique Latin America is mostly privatized now and The World Bank people are fond of saying that the biggest non-privatized railway in Latin America is Cuba. So the next big opportunity in the developing world will be Africa. RDC is very proud of its association in Africa with the former Malawi Railways, which was privatized at the end of 1999 and operates as Central East African Railways. We consider this venture the first private sector rail investment in Africa since our competition is the national railways of France and the national railways of South Africa. So we are the only private rail company which is making direct investments in Africa. Again, this is a joint venture — in this case, with the government of Mozambique’s railway, CFM, as well as local investors. Our lead partner is ERL, which is a Bermuda company with offices in Washington. CEAR has recently played an important role in famine relief. I would argue that there would be a lot more people starving if the railway was still in government hands. It has been difficult but the railway has been better equipped to deal with the famine now that it’s in private hands. The western part of the railway is in Malawi and it goes to Mozambique in the east to the Port of Nacala on the Indian Ocean. Our goal is to integrate this corridor into a general cargo carrier, employing various transportation modes – Emerging Corridors in Emerging Markets. We believe that this is the first private sector integration of a railway and a port for general cargo purposes. It is our goal in the next three months to have the financing completed, which we have literally been working on for years, to bring the Mozambique side into this corridor so that it will finally be integrated. |
||||
Estonia Despite the fact that RDC’s focus has been on the developing world, we have now been able to establish a small toehold in Europe as part of the group that privatized the Estonian Railways in August 2001. This group is led by Ed Burkhardt, formerly of Wisconsin Central and EWS, and we are also partners with Jarvis, a UK company, in this venture as well as Estonian investors. Eesti Raudtee is a big business, a heavy-haul North American style railway that moves 40 million annual tons. By North American standards this would be a small Class 1 railroad. The railroad runs approximately 70 freight trains per day and provides infrastructure for passenger service for the international, domestic intercity, and even electric commuter service operators. It is a vertically integrated railway despite its being in Europe. It is a European railway, but it is a European railway that goes to Moscow, not Brussels! The Port of Tallinn is the main reason this railway operates. Our main business is moving Russian exports to the ice-free port of Tallinn (at least Tallinn was ice free up until about two weeks ago when, for the first time in recent memory, it got iced in for several weeks). |
||||
|
|
||||
|
|
||||
© 2003 Railroad Development Corporation
All photographs are the property of RDC. Unauthorized duplication is
prohibited.
