| CONFESSIONS
OF A MONOPOLIST: Investment in, and Management of, the Vertically Integrated Railway |
||||
|
|
||||
| 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 |
Question-and-Answer
Session |
|||
|
How
did you know how your first overseas investment in Argentina would go,
given the demand for rail transport and the Argentine economy is not
noted for great successes? So is your investment in Argentina still
delivering a return for you or, in light of 10 years’ experience,
would you have actually gone into that if you knew then what was going
to happen to the economy? |
||||
|
I
would describe the Argentine investment as being a “fair” result; it
was certainly strategic (by the way, a “strategic” investment is
something that you do regardless of whether it is economic or not). With
the benefit of hindsight, it was strategic for us to get involved in the
overseas railway business. On an economic basis, it has done okay; the
growth has not been what we would have liked because of the economic
circumstances. However, in recent years with devaluation we have been
doing better and the reason is because our customers pay us in dollars
and our cost structure is in pesos. You should not expect a fast buck in
the railway business in any country, and certainly we have not made a
fast buck in Argentina.
In the long run it is an economically sound business because it
started with such a low base that any improvement is dramatic and it has
been fundamentally good for the country as well. |
||||
|
Do
you know of any disintegrated railways that work? |
||||
|
I
guess by my definition it “works” if you invest in a disintegrated
railway system, or whatever you want to call it, and it turns out to be
a good investment; because if it doesn’t, then you know that the model
is not necessarily sustainable. In terms of disintegrated railways I
think there are some examples; I think Estonia from a passenger
perspective is a pretty good one. The passenger business in Estonia has
been privatized separately and has been better off because it has
investors who are focused on passenger marketing which is different from
freight marketing. I would also point out that Estonian Railways
recently sold its interest in the for-profit international passenger
business for a price higher than a dollar which would suggest that that
business has some value. That is one example where I think
disintegration has not been a problem. Although I would say that the
Estonian model is like the North American where the core business, which
is freight, also has the infrastructure so at least there is no
disconnect between freight and the infrastructure and that may be why it
works so well. I think we do a good job of handling the passenger
trains; I use Max’s trains on a regular basis and I don’t recall
being late despite the growth of the freight business. I think it is a
pretty good and symbiotic relationship. I’m sure there are other
examples but they escape me at the moment. |
||||
|
Do
you have to worry about repatriation of funds from places like Africa?
How about corruption? |
||||
|
It
is going to be awhile before we repatriate funds from Africa; the reason
is that you need to have profits to repatriate. At the moment — with
gearing up from the moment of privatization, dealing with the recent
cyclone, the famine, etc. — all of the cash flow has gone back into
the company. I would have to say that we have not seen a lot of
corruption. Everyone knows that we’re a straight bunch of people, but
more to the point that the railroad is poor. Corruption may be something
you find in other businesses but railroads are not known for their
wealth, so they are less likely to be a target than for example,
electricity, telephones, and some more substantial parts of the
infrastructure business. I hope that answers your question. |
||||
|
I’m
trying to understand your point where you said that your Iowa Interstate
has at least three other lines that parallel it.
|
||||
|
Yes,
the Class 1 railways basically run from Chicago to the West Coast,
running through Omaha on their way to the West Coast, and they are our
competition. |
||||
|
What
am I missing here — there are three railways that serve the same
market but you consider yourself a monopoly? |
||||
|
My
point was that there is no monopoly, except that we are a “monopoly”
by European standards in Newton, Iowa. |
||||
|
The point I’m trying to
understand is that you’re saying that integrated railways are worth
less because people are now competing with it and it is no longer a
monopoly; but yet you have viable businesses in the United States that
are monopolies but there is nothing stopping you from cannibalizing your
competitors or your competitors cannibalizing you.
|
||||
|
I
cannot disagree with you. Taking the European definition of a monopoly
and applying it to Iowa, we are the “monopoly” in Newton, Iowa, to
the extent that we are the exclusive railroad going into the Maytag
washing machine plant in Newton. But that’s not to say that Burlington
Northern Santa Fe couldn’t send a truck over to take that traffic 25
miles across to their main line. What I’m saying is that we have a
competitive advantage against trucks or rail-truck intermodal service
because we have steel wheel right into the siding, which means for that
particular movement there is no trucker involved, and we don’t have to
subcontract truck delivery to landlocked customers on our railroad.
These are little niches of rail-competitive advantage in terms of
delivery right into the customer’s siding; but by the European
definition that would be a monopoly. |
||||
|
We
still have those monopolies in the UK; many freight terminals are owned
by the major freight carriers. What am I missing here? You’re saying
monopolies are good, but we don’t have the opportunity to compete for
this traffic. |
||||
|
That’s
a fine point of context. Let me take a coal movement for example —
to the extent that there is a coal movement from a port to a
power plant, I would say that it is a pure non-monopoly in that any
train operator can rent a locomotive and haul that traffic from the port
to the power plant. There is no place to hide in that environment.
That’s my point. |
||||
|
There’s
no place to hide between Chicago and Omaha, correct?
|
||||
|
There
are the shadows between Chicago and Omaha; little branch lines and
places where our railroad goes, and the only way the other guy can come
over is with a truck. That’s where these little profit margins allow
the weakest and smallest railroad in that corridor to survive if not
prosper. These are the economic underpinnings of the North American
model. You’re right; there are no monopolies in North America because
there are trucks and there is truck-rail intermodal service. But the
cost characteristics of a single wagonload private siding business
allows one to make a profit, not a big profit, but a profit depending on
the market. |
||||
|
How
do you deal with currency fluctuations, fuel prices, etc.?
|
||||
|
Mostly
we bear the full risk of currency fluctuations and fuel price
fluctuations. We tried to get cute about five years ago with fuel price
hedging on the Iowa Interstate and it was not a successful experiment
for us. We’re just not sophisticated enough to be able to do that in
an effective way. We take a risk by coming into a country and relative
to that fuel prices and currency fluctuations are also a risk, but
they’re less of a risk.
In other words, we have a high tolerance for risk just by virtue
of the business we’re in, and fuel prices and currency fluctuations
are relatively minor risks in comparison with some of the other risks
that we take. |
||||
|
Can
you expand on your relationship with CFM in Mozambique? On the one hand
you’re planning to take over their line into Nacala; on the other hand
they’re your partner from Nacala to Malawi. |
||||
|
The
deal with CFM is that in the case of the Nacala Corridor (this is in
both Malawi and northern Mozambique), they act basically as an investor,
as a contributor of assets, and to keep an eye on the interests of the
State. Daily management of the railway is by the private sector group
but the State has an economic interest in the business so if there are
profits to be made, not only does the country have the benefit of having
a functioning railway with all the strategic benefits of lower
transportation, income taxes, etc., but also if it turns out to be a
gold mine, then the State will benefit economically as well. |
|
|||
|
Can
I get your feedback on the cost to maintain your right of way?
The costs in this country are enormous as regards infrastructure.
How do you manage to raise sufficient capital to maintain your
infrastructure?
|
||||
|
We
do not receive government assistance anywhere, as a general statement.
In some cases there are low-interest loans that are available from
government sources, but in general we are expected to finance our
business — including infrastructure — from the business. If you
enter into an environment like that, then you need to have your
financing in place or else do transactions that are small enough that,
in case there is a shortfall, you can fund it out of your own pocket.
This is certainly the case in Guatemala. Like I said, we had thought
that we would get funding because it is an essential infrastructure in a
developing country. We were quite surprised to learn that we were an
Environmental Problem; and the net result of that is that we had to fund
it out of our own pocket. That’s the way it is. Nonetheless, I like to
think of our group as being “the people who brought the Guatemalan
railway to its knees;” I say that because the Guatemalan railway was
prone before we got involved! I’m not going to tell you that we have
an infrastructure that is capable of running everyday without
derailments. But the railway is running in such a way that customers are
using us and the occasional derailment is not a factor in terms of
whether we are going to make it or not. It is an imperfect solution but
we have got the railroad running more or less on a shoestring budget. |
||||
|
Going
back about three questions and your response, I think the issue of coal
movement in this country is by virtue of the decisions about the size of
ships, the ports they go to, the rates, or subsidies at various ports,
and a very peculiar pricing system for the rail freight in the UK so I
don’t think it is quite as simple as “dog eating dog”.
Secondly, given that one is only competitive over relatively longer
distances and that your washing machine manufacturer plant seems within
range of other railways, how much traffic do you take out which passes
onto other carriers to get to its destination and what percentage do you
see to its final destination?
|
||||
|
Of
the direct-rail traffic, as opposed to the stuff that goes in and out on
the highway, I would say 100% of it is interlined.
In other words, we do not take it to its final destination;
everything we handle we hand off at Chicago or Omaha to a connection.
We’re a feeder line. One way to look at it from the Maytag perspective
is that we’re a feeder line that runs east out of Newton, and we’re
a feeder line that runs west out of Newton. Think of it this way: if it
were more economic for the railways that parallel us to send trucks in
to bring it to the nearest railhead, they would do so. But because of
the efficiency of delivery to private rail sidings, we have this little
niche of substituting for the truck haul to the railhead by taking it
rail-direct; and that’s where the profit margin is. I do not know a lot about the Speedlink business, but it seems to me that that could have been a good business because it was wagonload — siding to siding — as I understood it. That would have been a very interesting business if it had survived. Any time you introduce a truck into the origination or termination of a shipment, in this environment you’ve left probably 25% of the revenue on the table right from the beginning, especially when we talk about putting three truckloads into a rail wagon. Whenever you do not go directly to the customer’s siding, you have to pick up three truck shipments to get from the railhead to the customer. I would be the first to say that it doesn’t look great to see a shunting locomotive hauling two or three wagons; but it would still be cheaper than 9 trucks. That was the point. |
||||
|
|
Wasn’t
there a more optimal solution for the locomotives in Estonia, such as
re-engining the existing fleet? |
|||
|
No,
we did not have the time. The simple solution was to get used
locomotives into service as soon as possible. These are off-the-shelf
locomotives that are 10-15 years old; there was probably a more optimum
30-year engineering timeline in terms of what would have been the
optimum. But financing was not unlimited and it was basically a race
against time because Estonia competes with Latvia, Lithuania and Russia
for transit flows. And we and the ports are trying very hard to maintain
Estonia’s competitive position even as new ports are being built in
the region. So the best disincentive for someone to build yet another
port in Russia is for Estonia to have the capacity to handle that
traffic today. So there is a high emphasis on speed in terms of what we
needed to accomplish. |
||||
|
Can
I ask you about labor costs and local practices. In the European
environment or, in this case Soviet Railways, do you have any pearls of
wisdom in this regard? |
||||
|
I
come from an environment where the deck is distinctly stacked against
labor, and I would say punitively so. If you buy a branch line in the
USA, you get to fire the employees and hire them back tomorrow at
whatever wages you choose. If you own a short line railroad and you sell
it to someone other than yourself, the buyer can fire the employees and
hire them back the next day at whatever wages they choose to pay and the
government will issue a restraining order to prevent them from striking.
I think it is unfair and we have been unable to compete with people who
do that in the US, which is why RDC has not been a successful company in
the USA. But each country is case by case. In the case of Estonia, we bought the stock from an existing company and essentially maintained all of the existing contracts. So we are incrementally negotiating new labor agreements as they come forward. In the case of Argentina, we went from 12,000 people to 2,000 the day we started operations; but of the 2,000 people we hired, we doubled their wages. In case of Guatemala, we gave the employees a raise when they were hired, but we have since not given them a raise because of the company’s economic condition. It depends on the circumstances but I think, in general, labor really is case by case; I would not want to make any broad generalizations about any sort of model as to how you deal with labor. We try to be fair and transparent and we also have to accept whatever the local, legal and business environment is in terms of how to deal with it. I have the reputation as being relatively pro-labor among my colleagues in the USA and that has generally been a competitive liability, because it’s meant that we are not competitive since our competitors will fire people and hire them back at lower wages. We have not done that. |
||||
|
Do
you see opportunities for your company in the United Kingdom? |
||||
|
No. |
|
|||
| Why
not? |
||||
| We
came here in the mid 1990s and saw two distinct types of investors
emerge. One were the bus people who were going to bring Dynamic
Thrusting Private Sector Management from the bus industry to the
railways, and the other were the experienced railway managers who had
been working in this environment all of their lives. Neither group
really saw a benefit to associating with a company like us; and I think
rightfully so because this is primarily a passenger environment and we
do not “do” passenger service in the USA. We did have one flirtation
with one of the companies who was bidding for a freight company, but it
turned out that all they wanted to do is have us sign a Confidentiality
Agreement so we wouldn’t compete with them for that particular freight
business. So it was not something that really got off the ground. I
would encourage you to visit our website and view
my comments in 1995 about the direction I thought that at least the
freight business would take and draw your own conclusions as to whether
we were right or wrong. |
||||
| You
very succinctly observed earlier that the railways in Estonia go to
Moscow and not Brussels; do you see any threat or opportunities to the
way that you do business or the structure of the business in Estonia
given the EU’s promotion of vertical separation? |
||||
| It
would be difficult to imagine how you would take a privately owned,
vertically integrated railway in Europe which does have an Open Access
scheme in place — there is an Open Access capacity allocation and
pricing mechanism in place in Estonia – and all of a sudden convert it
into a European-style Open Access country. It would essentially be a
de-facto nationalization and I think that would be very complex. Peron nationalized the railways in Argentina in 1947; those railways were pretty marginal and at the beginning may have benefited from state ownership because the value of them was fairly low. But in the case of Estonia, the railway is functioning today with a better safety record, handling more traffic, and making the ports more competitive than when the State owned it. I’m not sure what the benefit would be of State ownership of Estonian Railways. If Open Access is imposed by fiat from Brussels, that would be a de-facto nationalization. |
||||
| In
the various countries where you are operating, have you found that the
government in these countries is your partner, helping you to succeed,
or just seeking to get a transaction out of the way and then fostering
competition by trucks, and so on?
Has there been a partnership — negative or not? |
||||
| In
general, the countries in which we are operating were quite happy to be
out of the railway business.
In Guatemala it certainly was irrelevant because the railway was
losing money, it was closed and it had nothing to do with the economy. I
think in general that the governments of the countries in which we
operate are looking upon us as their partner, including having us run
the business in such a way that demands for financing from them either
don’t occur or are certainly minimized. So in that respect I think it
is a very good relationship; it is a realistic relationship and it
solves two problems for the government:
(1) how to make the economy more competitive; and (2) how to
eliminate drains from its treasury. Unfortunately, the environments in
which we operate don’t exclude cyclones, etc.; but for the most part
they should function within the private sector without having to go to
the government for largesse. Thank you. [END] |
||||
|
|
||||
