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

2. 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

3. The European challenges to reform the Railways

4. 1980- 1990 1991- 2001 2000- 2001 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 20 - 40 years Passengers, Freight, GDP Passengers (1) (passengers km) Freight (2) (tones km) GDP (constant prices)

5. Transport market evolution în European Union between 1970 - 2001 Road Rail Maritime Inland waters Pipes X 1000 mil. tone km X 1000 mil. passengers km FREIGHTFREIGHT PASSENGERSPASSENGERS Rail RoadRoad Rail

6. 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

7. 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)

8. 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)

9. 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

10. Romanian Railways Reform

11. 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

12. Traffic volume Market share

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

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

15. Railways transportation market share in Romania and EU (before May 1 2004)

16. STAGES OF RAILWAY REFORM 1991-1998: Commercial re-orientation of activities Preparation of the legal framework for the reform 1998: Main institutional railway reform 1999-2003: Consolidation of new born companies New private operators Outsourcing (Subsidiaries of railway companies) 2003-2008 Privatization of most of the subsidiaries Inter-operability Consolidation of Romanian Railway business-oriented approach

17. 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

18. 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

19. 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

20. 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)

21. New Legal Framework

22. 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

23. 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]

24. l 6 Laws l 5 Ordinances of Government l 29 Decisions of Government l 55 Decisions of Ministry of Transportation New Legal Framework 2001 - 2004

25. Organization and Management on main lines of business

26. 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 1992 - 1998

27. CFRCFR-Marfă CFR-Călători SMF SAAF S N C F R Railways Reorganization 1998 - 2004 Railway M anagement Company PassengersCompany Assets Company FreightCompany NationalRailwayCompany(Infrastructure) 28 private operators Railway Authority

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

29. 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

30. Privatization

31. 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 1992 - 1998

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

33. 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

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

35. Concrete actions for a business-oriented Railway

36. 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

37. Reform of the financial & accounting system l Terms for realization: 2002 - 2006 l Objectives –Definition of Profit and Cost Centers –Definition of the cost of each activity –Improved access charge formula –Creation of a cost model

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

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

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

41. Private operation of low traffic lines l 2.800 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

42. Labour adjustment according to the market

43. 134.292 EMPLOYEES LESS – 66.5% Labor adjustment

44. Percentage of personnel cost in EU - 15 55% 45% 23% in Romania

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

46. Main costs elements at CFR Călători SA in 2004

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

48. 2002 2003 2004 268 366 339 Romanian Railways Productivity vs. New EU Members

49. CFR Freight Productivity & personnel evolution 199920002001200220032004 Productivity (x1000 tone*km/employee)555617655647801808 Nr.employees28.67929.13227.10426.59120.70519.552

50. Adverse factors to be overcome

51. 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

52. Freight transportation market evolution 1990-2004

53. Passenger transportation market evolution 1990-2004

54. l Germany- 9.040 l Italy-7.928 l France-6.876 l Great Britain-2.985 l Switzerland-2,565 l Holland-2.273 l Belgium-1.957 l Austria-1.917 l Greece-1.079 l Spain-1.401 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 €]

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

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

57. The total infrastructure charge for Railways Undertakings 1999 - 2005 NECESITY TO AVOID CROSS-SUBSIDY

58. 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

59. 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

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

61. NEXT STEPS IN ROMANIAN RAILWAYS REFORM REFORM

62. 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

63. 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

64. Thank you for the kind attention ! Vasile Olievschi e-mail: olievski@mt.ro