| CONFESSIONS
OF A MONOPOLIST: Investment in, and Management of, the Vertically Integrated Railway |
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| 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 |
Financial
Challenges – Squatters |
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Structural
& Financial Considerations |
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Table
A compares the railway environment from continent to continent and
it is interesting how South America and Southern Africa fit in. I would
encourage you to make the major comparison between North America and
Europe. In particular, note the “Orientation” line; I believe that
North American railways are freight oriented, whereas European railways
are passenger oriented. I think it is quite a substantial difference and
that is why my comments need to be taken in context in terms of the
conclusions that I will draw. |
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Table A - Environment |
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Most
importantly, the reasons for restructuring are substantially different
between North America and Europe (Table B). I
made the earlier comment that when I worked at the Rock Island Railroad,
25% of the US rail mileage was in bankruptcy. This is very much a case
of the government saying that you have to fix your own problems and
we’ll give you the freedom to go out of business; there is no money
— you need to fix your own problems. Thus, deregulation was the result
– the North American solution. In contrast, as I see Europe, there is
a more substantial political component that’s driving the process; in
particular, note that I put “de-monopolization” as a reason for
restructuring. This is my personal opinion. |
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Table B - Restructuring Origins |
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| Table C - Strategies |
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For numerous examples (Table D) as to why this is the case, look at the comparison of Exclusive Franchises, which is what we have in North and South America and Africa, with the Open Access environment that is being promoted through Europe. One of the key things to consider, at least from a financial perspective, is the value of the business – is the business worth anything? |
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| Table D - Market Force Results | |||||||||||||||||||||||||||||||||||||||||||||||||
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For example, consider the price paid for Conrail when it was vivisected a couple of years ago – half went to Norfolk Southern, half went to CSX. History has proven that the price was way too high and, in fact, I believe that those railways are now worth less than Conrail alone before they embarked upon that transaction. But the point is that at that time the financial markets believed that there was some significant value in it. Contrast this with the price that EWS was sold for when it was privatized — and I think history has subsequently proven that it is worth even less. The primary reason is Open Access. As I’ve said before, I read Modern Railways and it’s the basis for my forming opinions about a lot of things UK-related and Europe-related. As you flip through issue after issue, there’s always the picture of the named locomotive — “Her Majesty’s 18th Royal Fusiliers” or the like — hauling a coal movement that used to be hauled by one operator and is now being hauled by another one. Example after example describes traffic that was EWS’ and now it’s moved by Freightliner, etc. As an outsider it seems to me that for the most part traditional movements like coal are being shifted from freight operator to freight operator as a result of low margin cannibalization. I think that has a lot to do with the financial results. I see Max Steinkopf in the audience. Let me also say that I have read about GB Railways’ getting coal business and that was not a personal insult. [Question from Mr. Steinkopf] What about Estonia? We’ll talk about that later. [Mr. Steinkopf] You’re saying that you’re the first; didn’t we buy it? You’re right; we were the second into continental Europe (but first at a national level!). GB Railways was the first and I’m glad you’re here to keep me straight. And again, I apologize for not mentioning your own cannibalization of EWS’ business. |
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| Conclusions So let’s draw some overall conclusions, at least from a financial perspective (Table E). Politics are country-specific; but the primary focus of Open Access from my viewpoint is the political desire to de-monopolize, i.e. to take things apart. By contrast, the Exclusive Franchise model more or less left it alone and was based on the philosophy, “Look, you figure out the best way to serve the customer because the customer has trucks and we don’t really care if you exist or not; you must stand on your own.” |
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| Table E - Conclusions | |||||||||||||||||||||||||||||||||||||||||||||||||
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In the Open Access environment I would say that the customer benefits because at least with freight you have three or more companies, each going after every move and you can basically play them off against each other until there is no margin left. However, in the Exclusive Franchise environment, because the prime focus is on the customer the investor is rewarded because there is a margin to be earned if you can compete with trucks — as opposed to having other railways, with the same cost characteristics, competing for the same business. Railway environments are diverse and certainly a lot of what we have experienced in the USA is not translatable; everything has to depend on local context. I would also argue that structure is extremely critical. I spoke earlier about culture and local partners; railway skills are great but it is more important to be integrated with your partners and with the local economy. It is easier to screw up culturally than to screw up technically. As we look at new investment opportunities — and I can tell you that there are not a lot out there — the first thing to look at is: Is the government serious? Or is privatization being promoted as a way of making the government look busy even though they are not really serious, or is there some other agenda? If that test is passed, then the next question is: Who will be your competition for this opportunity? In the case of Africa if we see the national railways of France or the national railways of South Africa as our competitor, we are not likely to compete because I stand before you to tell you that we do not have as much money as the government of France or the government of South Africa. More to the point, we have not been able to convince a broad body of investors that this is a great business. Third, it is very important to have local partners. We have been prevented from making some of our gravest potential errors by having our local partners interpret things in a different way in terms of culture, context and politics. Without local partners, you are unlikely to see us involved. Last but not least, I still think railway skills are important and bring significant value to the business but they are less important than the other factors. If you go to our website, www.RRDC.com, you’ll see a lot of what I’ve said in the Position Papers section and it would be very interesting to hear from you. We go out on a limb on many issues and if you’ve found my talk interesting, I think you’ll find the website interesting. At this point, I would like to close by thanking you for the opportunity to speak to you and I hope that we will have a good question-and-answer session and that you will prove me wrong on at least some of the points that I made tonight. This is the London School of Economics and we’re all here to study railways. I consider myself a student of railways and I try to learn something everyday. |
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