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Railway Restructuring's Origins Range from Economic to Political... There is a wide range of reasons as to why railways have been restructured (Table C). In North America, the reason has primarily been economics, and in particular, bankruptcies. In 1980, approximately one-third of the railway mileage in the USA was in bankruptcy and there was very little investment taking place. The Iowa Interstate branch to Peoria, Illinois now at the speed of 25 miles per hour for freight trains had at the time of the Rock Island bankruptcy a top speed for passenger trains of 10 miles per hour (I know...I first rode the Peoria line in 1976 as a passenger and since 1991 have done so as Chairman of Iowa Interstate.). This is how far North America has come. In contrast, the reasons that railways have been restructured in Europe are as much about politics as economics. Railways are beginning to be restructured for financial reasons, because railways generate losses; but the main thrust is one of de-monopolization meaning dismantling institutions, not restructuring them. |
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...Producing a Wide Range of Strategies Various strategies have evolved within different environments (Table D). The primary strategy that has driven railway restructuring in North America has been, once again, economics in particular, deregulation. Deregulation means railways compete with railways or more importantly, railways compete with trucks. Deregulation was implemented to create value for railway customers because competition creates lower transportation costs through efficiency. In South America the strategy was to privatize. The goal was first to get people back to using the railways and only second to dismantle institutions. In contrast, the prime thrust of Europe is de-monopolization and only secondarily is privatization the goal. |
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...But, Results to Date Have Consistently Been Driven by Market Forces Ultimately it is the marketplace and not politics that drives the results (Table E). And where the intent may be political, the marketplace still has a way of figuring out how to achieve an economic result. In particular, I would argue that the financial markets have rewarded the investment in equipment and infrastructure based on demand for transportation in both North and South America. And in Europe, there has been customer-specific investment in equipment; for example, in the United Kingdom, special cars for containers, cement, etc. But the investment in infrastructure has largely been driven by politics in terms of where the money is being spent. One of the big constraints on the ability to expand the freight business in the UK is that the infrastructure provider -- Railtrack -- is not disciplined to be responsive to the needs of the freight operator who is trying to be responsive to the needs of the freight customer. |
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In the UK, three separate trainload freight companies were carved out of British Rail to compete with each other, and the marketplace figured that out as well. The same company EWS bought all three freight operators and put them back together again. So it was politics that broke up the rail freight business into three companies in the UK and the private sector put them back together again. This is what is also driving the merger trend in North America and, in fact, consolidation of RDC's businesses in Argentina with those of our neighbors in Brazil. In terms of the value of these businesses in other words, what an investor should be willing to pay Open Access has diminished the value substantially of the freight business. In particular, the price that was paid for the freight business in the UK was roughly 20% of what that business would have gone for in the USA, if there were no Open Access. Based on performance to date, even though that price was low, it still may have not been low enough because of their inability to grow the business because of the capacity constraints imposed by Railtrack, as well as an underestimation of fundamental thrust of Open Access the taking of value from the operator to the customer to the point that the business may not have any value at all. In addition to the financial markets, it is also important to consider the transportation markets (See Table F). What is happening in the transportation marketplace in the Open Access environment, as opposed to the Exclusive Franchise environment that we have in North and South America, is that European traffic continues to decline, whereas in Latin America traffic is increasing. In fact, in Europe barges are increasing their market share for the transportation of containers at the expense of rail. By contrast, in places like Africa traffic is returning because the railways are integrating themselves or, as described earlier, they are at least cooperating. Capacity constraints have reduced the ability to grow the freight business in the UK, whereas in Latin America, concession agreements have been restructured to promote additional investment. |
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A prime example of why Open Access is not such a good thing for freight railways, is what has been going on in the UK in the last year. The UK's Modern Railways magazine recently devoted an entire page to nothing but various descriptions of traffic that had been cannibalized from EWS, the largest freight operator, by other Open Access operators. One article described how a coal movement had been lost by EWS to Freightliner. There was another example of how a movement of ballast had been lost by EWS to GB Railways. This is not taking trucks off the highways this is taking existing railway business and hauling with someone elses locomotives. Again, its about transferring value from the railway operator to the customer. One must consider that if most of the value goes to the customer and there is very little left for the railway operator, why invest in railways? |
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