RAILWAY REFORM IN ROMANIA Washington, 10 March 2004 V. N. OLIEVSCHI General Director Department for Railway Transportation

Main Ideas l The European challenges to reform the Railways l Concepts and principles of the Romanian railway reform l Main achievements in the Romanian Railway reform l Adverse factors to be overcome l Next steps in the Romanian Railways reform l Lessons learned

The European challenges to reform the Railways

GDP (real growth) 2,32,11,6 Industrial production 1,81,00,0 Passengers transport (passengers km) ( all transportation modes) 3,01,71,1 Freight transport (tones km) ( all transportation modes) 1,62,7-0,2 The ratio between economical activities / transport necessities in UE-15 The actual transport volumes will double in the next years Passengers, Freight, GDP Passengers (1) (passengers km) Freight (2) (tones km) GDP (constant prices)

Transport market evolution în European Union between Road Rail Maritime Inland waters Pipes X 1000 mil. tone km X 1000 mil. passengers km FREIGHTFREIGHT PASSENGERSPASSENGERS Rail RoadRoad Rail

Why are our competitors in a better position ? First objective of the Common Transport Policy To create a single, competitive market for each transportation mode Achieved by other modes of transport # Onlybeginnings in railways

Nr Name of Directive 1 Directive 91/440 on the development of the Community Railways 2 Directive 95/18 regarding the licenses of the railway company 3 Council Directive 2001/12 amending Council Directive 91/440 on the development of the Community Railways 4 Council Directive 2001/13 for the modification of Directive 95/18 regarding the licenses of the railway company European Council Directives (1)

Nr. Name of Directive 5 Council Directive 2001/14 on the allocation of railways infrastructure capacity and the certification regarding safety 6 Council Directive 2001/16 on the interoperability of the trans-European conventional railway system 7 Council Directive 96/48 on the interoperability of the trans-European high-speed rail system European Council Directives (2)

The unique European railway transport market l Accelerated market liberalization –2007 for freight (including cabotage) –2012 for passengers in international traffic l Competition between railway operators l Revolution in the railway operators’ mentality l Harmonization in the interoperability and safety domains l Separated passengers and freight transport networks (regularity and punctuality) l Take over a larger percent of the European transport market

Romanian Railways Reform

Factors resisting change for the economies in transition l Management and employees culture of ‘command and control’ l No history in the commercial marketplace l Weak technical status (infrastructure and rolling stock) l Government budget constrains for transitional social and track subsidies l Economy in transition (difficult to make predictions about traffic evolution) l Political instability and change

Traffic volume Market share

Romanian Railways vs. EU-15 (UIC Statistics – 2002)

Romanian Railways vs. New EU Members (UIC Statistics – 2002)

Railways transportation market share in Romania and EU (before May )

STAGES OF RAILWAY REFORM : Commercial re-orientation of activities Preparation of the legal framework for the reform 1998: Main institutional railway reform : Consolidation of new born companies New private operators Outsourcing (Subsidiaries of railway companies) Privatization of most of the subsidiaries Inter-operability Consolidation of Romanian Railway business-oriented approach

The major directions of Romanian Railways Reform l New legal environment l Focused organization and management on main line of business l Permanent actions for consolidating a business oriented railway

New legal environment –Competition, free access to markets –Ownership – public, private, or partnerships –Transparent subsidies for passenger traffic –Ballanced State financial support for the road and rail infrastructure –Outsourcing of ‘non core’ activities

Focused organization and management on main lines of business: – Infrastructure – Freight l Type of commodity – Passenger l Long distance l Short distance Specific Markets Outsourcing any other activities

Permanent actions for consolidating a business oriented railway –Labour adjustment in accordance with the demands of the market –Cutting down the operating costs (surplus assets, closing units) –Business plans with specific targets –Business-oriented tariff policy access charge –Methodology for the calculation of infrastructure access charge (avoid cross subsidy)

New Legal Framework

Legal Framework for Romanian Railways Nr European Council Directive Romanian Law Status 1 Directive 91/440 on the development of the Community Railways Emergency Ordinance 12/1998 In force 2 Directive 95/18 regarding the licenses of the railway company Decision of MTCT 778/1998 In force 3 Directive 2001/12 amending Directive 91/440 on the development of the Community Railways Emergency Ordinance 125/2003 In force 4 Directive 2001/13 for the modification of Directive 95/18 regarding the licenses of the railway company Order of MTCT 343/2003 In force 5 Directive 2001/14 on the allocation of railways infrastructure capacity and the certification regarding safety Ordinance 89/2003 In force 6 Directive 2001/16 on the interoperability of the European conventional railway system Decision of Government 850/2003 In force 7 Directive 96/48 on the interoperability of the European high-speed rail system Decision of Government 1533/2003 In force

l Accordance with European Union directives l New companies, free of historical debts, capable to supply transport services essential for society l PSO contribution from the state budget l Turning to account of exceeding assets for capitalization of newly established companies l Freight tariffs deregulation l Establishment of immediate privatization goals l More operators allowed Main provisions of the new legal framework 1998 [Governmental Ordinance 12 / 7 July 1998]

l 6 Laws l 5 Ordinances of Government l 29 Decisions of Government l 55 Decisions of Ministry of Transportation New Legal Framework

Organization and Management on main lines of business

GENERAL OVERHAUL OF TRACK GENERAL OVERHAUL OF ROLLING STOCK PASSENGER COACHES CLEANING COMMERCIAL ACTIVITIES IN RAILWAY STATIONS SIGNALLING AND ELECTRIFICATION ROMANIANNATIONALRAILWAYS INFRASTRUCTURE FREIGHT PASSENGERS REAL ESTATE Institutional Evolution of Romanian Railways

CFRCFR-Marfă CFR-Călători SMF SAAF S N C F R Railways Reorganization Railway M anagement Company PassengersCompany Assets Company FreightCompany NationalRailwayCompany(Infrastructure) 28 private operators Railway Authority

The commercial approach in railway STAT C F R – Infrastructure Manager Market PASSENGERRAILWAYUNDERTAKINGSFREIGHTRAILWAYUNDERTAKINGS

Public Service Contract l Four Year Contracts – annually updated –Infrastructure –Passenger Services l Safety and quality conditions for infrastructure operation l Level of access charge l Number of passenger trains to be operated annually l Quality criteria for each type of train l Annual subsidy approved by the Parliament

Privatization

GENERAL OVERHAUL OF TRACK GENERAL OVERHAUL OF ROLLING STOCK PASSENGER COACHES CLEANING COMMERCIAL ACTIVITIES IN RAILWAY STATIONS SIGNALLING AND ELECTRIFICATION ROMANIANNATIONALRAILWAYS INFRASTRUCTURE FREIGHT PASSENGERS REAL ESTATE Privatized Institutional Evolution of Romanian Railways

NationalRailwayCompany Railways Branches Rail Welding Company Signaling Equipment (production & maintenance) Heavy Track Machinery Traction Power Distribution Engineering & Design PRIVATIZED PRIVATIZED

2 Railcars Washing Companies FreightCompany Railways Branches Railcars Washing Companies (2 branches) Container Distribution by trucks Transshipment Railcars Maintenance & Overhaul of Railcars Maintenance & Overhaul Locomotives PRIVATIZED PRIVATIZED

PassengersCompany Railways Branches Sleeping & Restaurant Coaches Operations Maintenance & Overhaul of Coaches (4 branches) Tickets Distribution Maintenance & Overhaul of Locomotives PRIVATIZED PRIVATIZED

Concrete actions for a business-oriented Railway

l Railway Infrastructure Management l Rolling Stock Management l Train Circulation Planning and Monitoring l Freight Operations & Commercial Management l Financial and accounting system l Computer based ticketing system $ 70 Million Budget IRIS Integrated Railway Information System IT – Cost reduction tool

Reform of the financial & accounting system l Terms for realization: l Objectives –Definition of Profit and Cost Centers –Definition of the cost of each activity –Improved access charge formula –Creation of a cost model

Reduction of operation cost of infrastructure CFR S.A. Objectives

Non-Interoperable (Low Traffic) Railways Lines ~2.800 km (25%) 2% freight 8% pass.

Interoperable Railways Lines ~8.500 km (75%) 98% freight 92% pass.

Private operation of low traffic lines l km of lines offered for private operation l 3 bidding procedure organized l 846 km leased to 9 private operators (31%) l 450 km of track closed l The lines which will not be leased will be proposed to be abandoned

Labour adjustment according to the market

EMPLOYEES LESS – 66.5% Labor adjustment

Percentage of personnel cost in EU % 45% 23% in Romania

Main costs elements at CFR SA in 2003 Wages – low share

Main costs elements at CFR Călători SA in 2004

Wages – low share Main costs elements at CFR Marfă SA in 2004

Romanian Railways Productivity vs. New EU Members

CFR Freight Productivity & personnel evolution Productivity (x1000 tone*km/employee) Nr.employees

Adverse factors to be overcome

Adverse factors l Market evolution l European costs (rolling stock, fuel, energy, etc.) l Low passenger tariffs l Passenger subsidy dilemma l High cost of infrastructure l Cross subsidies l Distortion of market prices in transportation

Freight transportation market evolution

Passenger transportation market evolution

l Germany l Italy l France l Great Britain l Switzerland-2,565 l Holland l Belgium l Austria l Greece l Spain l Denmark- 861 l Norway- 734 l Finland- 431 l Ireland- 322 l Romania (2003)- 299 Public budget contributions in UE-15 in 2001 [Nera Study, December 2001] Public budget contributions in UE-15 in 2001 [Nera Study, December 2001] [Million €]

Acces Fee has a high share in total costs Main costs elements at CFR Călători SA in 2004

Acces Fee has a high share in total costs Main costs elements at CFR Marfă SA in 2004

The total infrastructure charge for Railways Undertakings NECESITY TO AVOID CROSS-SUBSIDY

The dilemma of railways subsidy l Subsidy in 2003 was 0,7 % from GDP l The nominal value of subsidy is much lower than the European average l The costs of operation of passengers services is close to the European level

Non-biased financial support of the State in infrastructure development ? 35 % of railway transportation tariffs are allocated to cover the access charge of Railways infrastructure < 10 % of auto transportation tariffs are allocated to cover the costs of Road infrastructure

l The construction of business- oriented railway system must continue What to do ? The new tradition – The continuous change, innovation and updating work practices

NEXT STEPS IN ROMANIAN RAILWAYS REFORM REFORM

l Integration of Romanian Railway Infrastructure in the European network based on modernization and significant reduction of access charge l Participation of Romanian Railway Operators on the international logistic chain services by a complete business process re-design The main challenges of the European integration

Lessons learned l Once the restructuring process started, do not stop changes, quick reaction to the market l Define mixed solution function of specific conditions (there is no guarantied successful approach) l Flexibility in implementation, do not ignore the feed back of the system l Cooperation with trade unions

Thank you for the kind attention ! Vasile Olievschi