Options for reform : Turkish state railway : Turkish - State railway

OPTIONS FOR REFORM TURKISH STATE RAILWAY TCDD 15 June 2002 OPTIONS FOR REFORM TURKISH STATE RAILWAY TCDD Prepared By: THE WORLD BANK 15 June 2002 CONTENTS CONTENTS.................................................................................................................................................................................... i I EXECUTIVE SUMMARY ..................................................................................................................................................... 1 1.1 Background .................................................................................................................................................................. 1 1.2 Structure of the Transport Market and the Role of the Railway ........................................................................ 1 1.3 Draft Railway Law ....................................................................................................................................................... 2 1.4 TCDD Restructuring Program ................................................................................................................................. 3 1.5 Alternative Restructuring Strategies ......................................................................................................................... 3 1.6 Conclusions and Next Steps ...................................................................................................................................... 4 II BACKGROUND .................................................................................................................................................................. 6 2.1 Introduction................................................................................................................................................................... 6 2.2 Railway Transport Sector............................................................................................................................................. 7 2.3 Summary ........................................................................................................................................................................ 8 III STRUCTURE OF THE RAIL SECTOR IN TURKEY......................................................................................................... 10 3.1 Transport Demand ..................................................................................................................................................... 10 3.2 Railway Traffic Characteristics .................................................................................................................................. 11 3.2 Physical Characteristics .............................................................................................................................................. 13 3.3 Structure of TCDD ................................................................................................................................................... 15 3.4 TCDD Staff ................................................................................................................................................................. 16 3.5 Summary ...................................................................................................................................................................... 17 IV RAILWAY LAW AND TCDD REFORM STRATEGIES .................................................................................................. 19 4.1 New Railway Management Law ............................................................................................................................... 19 4.1.1 Legal Structures ................................................................................................................................................. 19 4.1.2 Organization Structures.................................................................................................................................... 20 4.1.3 Financial Management and Subsidy Issues ................................................................................................... 21 4.1.4 Other Provisions of the Law ........................................................................................................................... 22 4.1.5 Recommendations on Railway Law ................................................................................................................ 22 4.2 TCDD’s Five Year Restructuring Program ............................................................................................................ 23 4.2.1 Restructured Organization ............................................................................................................................... 23 4.2.2 Improvement Strategies .................................................................................................................................... 24 4.2.3 Staffing Implications ......................................................................................................................................... 25 4.2.4 Financial Implications of TCDD’s Restructuring Plan ............................................................................... 25 4.3 TCDD’s Railway Network ........................................................................................................................................... 27 V ALTERNATIVE RESTRUCTURING STRATEGIES ......................................................................................................... 31 5.1 Minimum Restructuring: Base Case......................................................................................................................... 31 5.2 TCDD Strategy Case.................................................................................................................................................. 32 5.3 90% Traffic Network Strategy .................................................................................................................................. 33 5.4 Core Network Scenario ............................................................................................................................................. 34 5.5 Efficiency Improvements .......................................................................................................................................... 34 5.6 Privatization and Concessioning .............................................................................................................................. 35 5.7 Summary and Conclusions ........................................................................................................................................ 35 VI RECOMMENDED NEXT STEPS ...................................................................................................................................... 37  I EXECUTIVE SUMMARY 1.1 BACKGROUND D uring the 1990s, the Turkish economy was beset by frequent economic crises.. Fiscal imbalances, high inflation rates, and the subsequent stop and go economic cycles hit the Turkish economy, slowing growth and plunging the country into recession. Spiraling debt and interest payments coupled with failures in financial systems resulted in significant financial crises in late 2000 and early 2001. The Government of Turkey initiated a number of economic reforms to contain spending, cut its deficit, reduce inflation, and provide a basis for renewed economic growth. The Government has mapped out a structural reform program encompassing measures to address the biggest sources of fiscal deficits, strengthen the legal and regulatory frameworks, and accelerate the privatization of the remaining state enterprises. Reform of the Turkish Sate Railways (TCDD) is one of the Railway Cost to Government 900 main targets for change. Over the past few decades, TCDD has fallen into a 800 financial crisis from which it will not be 700 able to emerge without a dramatic restructuring of its governance and organization. US$ (2002 million) 600 500 TCDD operates the state railway, the 400 seven largest ports, and manufactures and repairs locomotives, wagons and 300 passenger coaches. As an enterprise, TCDD is the largest money loser among 200 Turkey’s public sector enterprises. The 100 railway is the largest element of TCDD by far. Railway operating costs represent 0 about 85% of TCDD’s total costs and 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 railway losses exceed TCDD’s overall losses. Over the 20 year period to 2001, the railway cost the government more than US$10.5 billion (in 2002$).1 1.2 STRUCTURE OF THE TRANSPORT MARKET AND THE ROLE OF THE RAILWAY Transport demand in Turkey has grown significantly over the past five decades. Overall, demand (as measured by passenger-kilometers and ton-kilometers) has grown at an annual rate of nearly 8% since 1950. Demand for Road transport has grown at an annual rate of about 7.6% while rail transport demand grown at about 2%, demand for water transport by 5% and air at over 16% per year. As in most developing countries, road transport is becoming a much more significant factor for both freight and passenger transport. 1 TCDD receives some subsidy payments for the operation of uneconomic lines and services and for renewal of infrastructure. In 2001, those subsidies represented about 33% of total TCDD revenue, about the same as the profits it earns from operation of ports. Page 1  TURKISH STATE RAILWAY: OPTIONS FOR REFORM Executive Summary Road transport represented about 37% and rail 55% of the total transport market in 1950. By 2000, road transport represented 93% of the total market, rail about 4%, water about 2% and air 1% of the total intercity T ra n s p o rt M a rk e t S iz e T ra n s p o rt M a rk e t S h a re s 400,000 100% Road Roa d 90% 350,000 A ir A ir 80% Tra ffic Units (Pkm +Tkm )-billion W ater W a te r 300,000 R a il R a il 70% 250,000 60% Pe rce nt 200,000 50% 40% 150,000 30% 100,000 20% 50,000 10% 0 0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 transport market in Turkey. While the current rail transport task is not insignificant, it is certainly much less important to the economy of Turkey than in the past. Although TCDD’s rail traffic market shares have declined significantly, overall railway traffic has grown somewhat. Total TCDD railway traffic units2 have grown at about a 2% annual rate. Freight services have grown at an annual rate of about 2.3%; Suburban services have lost traffic at about 3% per year, while intercity passenger traffic has increased by about 1% per year. Transport in Turkey has grown beyond the railway. Rail market shares have declined so much that the railway is almost irrelevant to the economy, except for the high cost of the institution of the railway. It is not likely that much new traffic can be attracted to the railway without significant investment in new and very expensive railway infrastructure, or major changes in railway service. In the past, it was argued that the railway could be more competitive and commercial if it reduced its cost structure and thus able to reduce its tariffs. This argument can no longer be made—freight prices already reflect a low cost structure. Over the past 20 years, TCDD has significantly reduced its freight tariffs. Low tariffs, set at levels of the most efficient railways in the world, have not helped TCDD attract freight traffic. Over the same period, TCDD has not done much to reduce its cost structure and now generates very large loses. TCDD is in the curious position of decreasing freight tariffs while increasing passenger tariffs, thus shifting relative government transport benefits from passengers, most likely poor, to major industrial concerns. To become a commercial enterprise, the railway will have to be radically reduced in size, service improved, and prices increased. 1.3 DRAFT RAILWAY LAW TCDD has prepared a draft new railway law to permit further restructuring than it has been able to accomplish to date. TCDD’s draft version of the railway law has many very good provisions—it reduces political influences on the railway; permits concessioning; restructures the railway into more focused business units; potentially engenders more commercial behavior and management practice. However, the draft law puts investment, operation, and management of railways in Turkey completely in the hands of TCDD. The law leaves the government with all the commercial risk but no power to limit or control railway spending. The law generates little pressure to provide value-for-money and provides no financial guidance to railway management. Further, the law establishes TCDD as service provider, safety regulator, price regulator, and sole contractor of railway services. Rail has become such a small part of the Turkish transport picture that abandonment of the railway entirely to its own control may not be of great concern. However, doing so while giving railway management a blank check could be very expensive. While current management may be focused on more efficient commercial operations, this law does not require it and it leaves the government subject to funding whatever 2 Traffic units are defined as ton-kilometers of freight traffic + passenger-kilometers of passenger traffic. Page 2 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Executive Summary railway management puts in its budget. TCDD is now very expensive; under the draft law; it could be come even more so. If the railway is to become commercially viable, restructuring much more fundamental than that proposed in the draft law will be necessary. As a commercial operator, TCDD cannot also act as regulator. With potential for private operations on TCDD lines, TCDD cannot also provide safety oversight. If the cost of railway service to the government is to be reduced, much greater reform than that suggested in the draft law will be required; the draft law will only succeed in creating a more powerful and more entrenched railway administration. 1.4 TCDD RESTRUCTURING PROGRAM TCDD has prepared a restructuring program that differs somewhat from that contemplated in the proposed law. The aim of the restructuring program appears to be to convert TCDD from a government agency more concerned about public services than profit-and-loss into a commercial entity oriented towards operating only commercially viable transport services. In this conception of TCDD, government is a customer and relations between railway and government are based on commercial principals and contracts. TCDD would pursue expanded public/private and national/local financing programs, encouraging private ownership of freight wagons, and local participation in commuter and suburban passenger services. In addition, it would expose more of its own activities to market place competition by outsourcing renewal and maintenance activities, purchasing services externally rather than self-providing them. Discussion with many TCDD senior officers reveals that they expect a significant increase in government funding to be associated with the new law, restructuring, and preparations for joining the EU.3 These new funds would be used to increase speeds, extend electrification, and increase line capacity by double tracking some lines.4 While the restructuring program does not show financial performance in detail, it appears that the restructuring plan, like the draft law, assumes that the government will fund all infrastructure maintenance and renewal expenses as well as TCDD’s capital program. Under the TCDD restructuring program, the cost to government could be reduced somewhat (to about $800-million per year) but would still total more than $8-billion over the 10 year period, assuming that major investment programs were not proposed by the TCDD Board of Directors. 1.5 ALTERNATIVE RESTRUCTURING STRATEGIES An analysis of the financial implications of the TCDD restructuring along with other alternatives was conducted to estimate the likely financial impact. Several alternatives were defined: 1 A minimum restructuring effort that stops with the changes currently taking place—elimination of the regional headquarters and some organizational changes within TCDD. 2 TCDD’s restructuring strategy, supported by the draft law on railway management. 3 An alternative that retains 90% of the current traffic but reduces network size by 60% 4 An alternative that reduces the network by about 53% and reduces passenger services to about 60% of current services, and freight services to 85% of current traffic. 5 Alternative 4 with efficiency improvements and a 100% increase in freight tariffs5 6 Alternative 4 with privatization of the core freight network and concessioning of passenger services. 3 TCDD management’s general observation is that government is spending too much on road construction, not enough to improve railway infrastructure. They also see significant state spending for rail transport in EU countries and anticipate that adjustment funds for railway infrastructure improvements will flow to TCDD. 4 TCDD’s permanent way department has established new standards for express train trackage calling for minimum radius curvature of 5,000 meters, centralized train signaling with automatic stop, double track, and electrification. 5 No loss in traffic was assumed even with this high level of tariff increase. Freight price-elasticity is now known but with the reduced network assumed, most remaining freight traffic is likely to have little alternative modal choice. Page 3  TURKISH STATE RAILWAY: OPTIONS FOR REFORM Executive Summary The alternatives analysis suggests that there are significant differences in the amount of cash consumed by the railway depending upon the size of the network operated, the efficiency achieved in its operation, and tariffs charged for freight traffic. If no reform is pursued, government will be forced to subsidize railway operations to the tune of at least $10-billion over the Rail Cash Flow $0 next 10 years. Substantial reductions in Concessioning Reduced Efficient Network network size (by 50 and 60 percent) reduce -$200 Reduced Network subsidy requirements to between $7-billion 90% Traffic TCDD Reforms and $8-billion. However, even with Base Case substantial reductions in network size, -$400 significant efficiencies in operating $ Millions (2002) practices, and increases in freight tariffs, -$600 government subsidies remain quite high— a about $5-billion over the 10 year period. Reductions in network size and the -$800 efficiency of operation have a significant effect on railway employment—cutting it -$1,000 by more than half between alternatives. -$1,200 The continuing high cash costs, even after 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009substantial network reductions, reflect the 2010 2011 light-density and high-cost nature of TCDD’s rail system. Reducing cash requirements substantially will require more commercial restructuring and reform measures—including making the network more efficient, increasing density, and reducing capital requirements at the same time. Concessioning or privatization of the freight network, substantial reductions in the passenger network, coupled with concessioning of suburban services and any remaining passenger services could reduce subsidy requirements to about $160-million per year, or about $3-billion over the 10 year period. 1.6 CONCLUSIONS AND NEXT STEPS The reduced network alternatives provide a basis for considering privatization and concessioning of both freight and passenger services further. In this case, the Government would privatize (or concession) the core freight network entirely and eliminate the need for government subsidies for this network.6 Suburban services could also be concessioned with the expectation of reducing operating costs by about 25%. A long-term concession could be even more attractive. TCDD’s suburban-service EMUs are aging and will require replacement in the near future. A long-term concession can be designed to include new equipment, maintenance facilities, and system upgrading. The net result would be a substantial reduction in government cash requirements for rail services. Assuming privatization of freight services and concessioning of remaining passenger services, government subsidy requirements could be reduced to the range of $200 million per year.7 To consider these alternatives more carefully and to determine the cash requirements associated with each alternative more completely and accurately, more analysis is needed. Recommended next steps for TCDD and the Government are: • Conduct a detailed and integrated Strategy Analysis using a financial model based on IAS. This strategy analysis should fully review alternative structures, including privatization and concessioning arrangements. This analysis should lead to the development of an Integrated Restructuring Plan for Government and 6 Subsidies may still be required to operate and maintain services on strategically important border connections. Such services would be subject to competitive bidding (there are a number of private railway operators active in Europe so significant competition is likely) and are likely to cost substantially less than current costs. 7 Maintaining EMU services and subsidizing high-speed services operating between Ankara and Istanbul, and contracting for the operation of strategic network segments that may not be commercially viable (e.g., connections to Greece, Iran and the Lake Van operation). Page 4 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Executive Summary TCDD. This analysis should address issues such as: If services are to be outsourced, who will do it; Who defines the services to be tendered; how are service providers regulated; who regulates safety; etc. • Develop revisions to the Draft Railway Law reflecting the integrated restructuring strategy developed in the Strategy Analysis. The draft law would establish the commercial enterprises recommended in the Strategy Analysis, and define the regulatory and government organizations needed to provide oversight of government spending, develop and manage the government’s transport strategy, and regulate commercial transport modes. This law would also reflect the requirements of EU membership. • Develop a network transition strategy to achieve government objectives. A network operations planning and line capacity model should be used for these analyses. These analyses should be integrated with a financial planning model so that operating plans, budgets, staffing, and physical resources can be identified and justified. • Prior to making any additional significant investments in new railway line capacity (including construction of additional tracks, improved signaling, extended electrification, and streamlining), a line capacity alternatives analysis should be conducted. The most cost effective operating methods, and investments for increasing capacity should be evaluated thoroughly and any new investment justified on a financial return basis. This will require a line capacity model and improved financial analysis tools and skills. Page 5  II BACKGROUND 2.1 INTRODUCTION O ver the past several decades, Turkey has experienced uneven economic growth, high in some years, plunging in others. Throughout this period, state spending has represented a significant portion of the national economy. The trend in economic growth, while erratic, has been downward. Over the same period, annual deficits as a proportion of GNP have grown rapidly. Budget Deficit And GNP During the 1990s, the Turkish economy was beset 12 Deficit as % of GNP by economic crises with increasing frequency. The 10 decade began with high deficits because of high 8 primary spending. But, as the national debt load 6 began to grow, increasing interest payments were 4 added to continuing high public spending levels 2 driving deficits yet higher. % 0 Consequently, net public sector debt rose from (2) 29% of GNP in 1990 to 61% by 1999. Net (4) domestic debt increased from 6% to 42% over (6) the same period. By 1999, interest payments on % Change in GNP (8) debt represented more than 70% of tax revenue; (10) the government could not continue to finance 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 core needs such as education, health, and justice systems.8 Higher tax rates and a narrowing of the tax base undermined the currency and cast doubt on the viability of the Turkish economy. Fiscal imbalances, high inflation rates, and the subsequent stop and go economic cycles Ratio of Net Debt to GNP hit the Turkish economy, slowing growth and 70% plunging the country into recession again. Spiraling 60% debt and interest payments, coupled with failures in financial systems resulted in significant financial 50% crises in late 2000 and early 2001. 40% The Government of Turkey initiated a number of 30% economic reforms to contain spending, decrease its Ne t Public Se ctor De bt a s % of GNP deficit, reduce inflation, and provide a basis for 20% renewed economic growth. 10% Ne t Dom e stic De bt a s % of GNP The reform program has many components 0% 1990 1991 1992 1993 1994 1995 1996 including the initiation of a floating exchange rate, 1997 1998 1999 2000 financial sector restructuring, establishment of an incomes policy to reduce deficits, establishment of a legal framework for further structural reform, and 8 From The Transition Program produced by the Treasury of Turkey, 14 April 2001. Page 6  TURKISH STATE RAILWAY: OPTIONS FOR REFORM Background & Introduction acceleration of privatization of state enterprises. The reform program has been in place since late 2000. The Government of Turkey is accelerating program implementation and receiving assistance in these efforts from the IMF and World Bank. For example, the Government has determined that there are some 40,000 to 60,000 redundant employees in State Economic Enterprises. As a part of its reform effort, the Government of Turkey has committed to eliminate all redundant employees by mid 2003.9 Also, as a part of the reform program, privatization of POAŞ (a petroleum distribution company), TÜPRAŞ (petroleum refinery), Türk Telekom, SEKER (sugar company), power generation and electricity distribution assets, and a number of other state enterprises and assets have been progressed at an accelerated schedule. Legislation necessary for implementation is in place and the government is considering other legislative changes, including a new railway law, to further the reform program. A central focus of the Government’s reform program is reduction of state expenditures and diminution of the role of the state in the economy of Turkey. 2.2 RAILWAY TRANSPORT SECTOR The Republic of Turkey General Directorate of State Railways Administration or TCDD operates the state railway, the seven largest ports in Turkey, and manufactures and repairs locomotives, wagons and passenger coaches. As an enterprise, TCDD, is the largest money loser among Turkey’s public sector enterprises. The railway is the largest element of TCDD by far. Railway operating costs represent about 85% of TCDD’s total costs and railway loses exceed TCDD’s overall losses. While the railway loses a significant amount of money, the ports make money. Over the 20 year period between 1982 and 2001, railway operating loses and subsidies10 totaled more than US$10.5 billion (in 2002 $). Over the same period, TCDD's ports earned an operating profit of nearly US$1.3 billion (2002 $), subsidizing the railway. The chart below shows the cost of the railway to government, including, as a cost, the subsidies paid for uneconomic services, and railway operating loses. The chart covers only railway activity, excluding profits from TCDD’s ports. Railway Cost to Government 900 TCDD’s railway handles less than 20 800 million tons per year, and only 15 million tons in 2001. It handles about 700 2% of the passenger-kilometers and 600 6% of ton-kilometers of intercity freight transport in Turkey. US$ (2002 million) 500 400 TCDD port revenue exceeded port operating costs by 165%. Thus, port 300 operations subsidize railway operations. Port charges could be 200 reduced by at least 20% if ports and 100 railway operations were separated; perhaps as much as 40% if TCDD - 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ports were privatized. A majority of Turkey’s import/export trade flows through TCDD operated ports. Excessive prices at ports extract a toll on the country’s economic growth and acts as a significant tax on both imports and exports. Reform of the railway sector which results in increasing efficiency, increased competition in the transport sector, and reduced port charges can directly help reduce poverty in the countryside by directly reducing railway transport costs. Such a program could substantially increase the competitiveness of the Turkish economy in a global context. 9 3 April 2002 letter to Mr Horst Kohler, Managing Director of the IMF, from Minister of State for Economic Affairs and the Governor of the Central Bank of Turkey. (www.treasury.gov.tr/Standby/mektup/mektup12/mektup_eng.pdf) 10 TCDD receives some subsidy payments for the operation of uneconomic lines and services and for renewal of infrastructure. In 2001, those subsidies represented about 33% of total TCDD revenue, about the same as the profits it earns from operation of ports. Page 7 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Background & Introduction The Government of Turkey and TCDD have studied the railway problem in the past. The Government’s National Transportation Master Plan has sought to increase railway market share, at least on paper, in several different five-year master plans. None have been successful. Two studies made in the 1970s (one by Italconsult in 1970 and another by Canadian Pacific Consulting Services in 1976) identified TCDD’s least profitable lines and recommended their closure. Lines totaling more than 2,500-kilometers were identified. Rather than close them, the Government of Turkey specifically subsidized the lines in a Decree issued in 1976. Even though most TCDD railway lines are loss making, TCDD continues to receive subsidies for the operation of the specific lines identified in 1976. TCDD also is compensated for operation of several loss- making express trains and for the operation of the Lake Van train ferry. These specific subsidies have been paid since the late 1980s. In 2001, the subsidies were equal to total railway freight revenue and represented about 20% of all revenue received by TCDD. TCDD also receives subsidies for track maintenance activities, typically for renewal costs. However, these subsidies are part of the national budget and TCDD rarely receives all that it requests. It is TCDD’s position that government has under-invested in railway infrastructure. In 1996, Booz, Allen & Hamilton completed a comprehensive study on restructuring TCDD. This study recommended restructuring TCDD as a commercial enterprise, separating non-core activities, and concessioning large parts of TCDD’s railway operating activities. This project also developed the outlines of a new railway law that would permit a radical restructuring of TCDD’s activities. Many of these recommendations have been included in a draft railway law that is now under consideration by the government of Turkey. 2.3 SUMMARY The Turkish Government has begun to implement a macro-structural reform program and tackle second- generation structural reforms. The Government has mapped out a structural reform program encompassing measures to address the biggest sources of fiscal deficits, strengthen the legal and regulatory frameworks, and accelerate the privatization of the remaining state enterprises. Reform of the Turkish Sate Railways is one of the main targets for change. Over the past few decades, TCDD has fallen into a financial crisis from which it will not be able to emerge without a dramatic restructuring of its governance and organization. Several factors make railway restructuring a priority for the Government’s agenda: • Growing fiscal imbalances make large railway financial deficits unsustainable; • As a future member of the European Union, Turkey must harmonize the rules and regulations governing railways to comply with directives of the EU’s Transport Commission; • Turkey must also address increasing congestion and pollution in large urban centers, particularly Istanbul, which is likely to require a profound revision of urban transport policies and substantial private investments in suburban railway services; • Globalization and continuing sharpening of economic competitiveness is putting pressure on reducing transport costs, which calls for an efficient modal split based on a cost effective and reliable transport services, including railway freight services; and • High port tariffs, required to support railway loses, and protected rather than competitive ports, hinder import and export trade and act as a brake on the economy. TCDD began the process of change in 1995 through a Japanese-financed study of TCDD’s restructuring needs. This study was completed in 1996 (see “TCDD Restructuring Study,” Booz Allen Hamilton, Ankara, July 1996). This study provided a necessary building block in as much as it identified serious structural issues requiring major changes and it helped raise the awareness on the “railways problem”. TCDD’s management has prepared a draft five-year restructuring program that contemplates the following actions: • Separation of passenger and freight services and creation of profit centers, Page 8 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Background & Introduction • Accounting separation of infrastructure, • Spin-off of non-core activities, including privatization of wagon factories, training and health services, among others • Elimination of subsidies except under explicit public service obligations contracts, • Authority to abolish or abandon uneconomic services unless compensated; • Devolution of local passenger services to municipal authorities, • Preparation of a comprehensive program for downsizing the existing labor force. This five-year program contains most of the elements of a railway reform and restructuring program. In addition, a new railway transport law has been drafted, though not yet adopted. The Government of Turkey has indicated its interest in opening the potentially charged topic of railway reform for frank discussions among the main stakeholders. This proposed activity would go further in exploring different reform alternatives, including a gradual involvement of the private sector in railways operation. This report analyzes the existing situation at TCDD, reviews the proposed new transport law, and develops an analysis of alternative railway reform methodologies. The analysis is based on data provided by TCDD, review of earlier reports, direct observation of TCDD railway operations over several days, and discussions with TCDD management and staff. Page 9  III STRUCTURE OF THE RAIL SECTOR IN TURKEY 3.1 TRANSPORT DEMAND T ransport demand in Turkey has grown significantly over the past five decades. Demand for passenger transport has grown at an annual rate of about 7.5%. Freight transport demand has grown slightly faster, at an annual rate of 7.8%. Over the same period, the structure of transport demand in Turkey has changed tremendously. As in most developed and developing countries, road transport is becoming a much more significant factor for both freight and passenger transport. Passenger Transport Market Size Freight Transport Market Size 200,000 200,000 180,000 180,000 160,000 160,000 Billion passenger kilometers 140,000 140,000 120,000 Billion ton-kilometers 120,000 100,000 100,000 80,000 80,000 60,000 Road Road 60,000 Air Air 40,000 Water 40,000 Water Rail Rail 20,000 20,000 0 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Changes in the structure of passenger transport demand are driven by many factors; the most important of which is economic development that provides citizens with the means to purchase automobiles. Changes in the structure of freight transport demand are more complex, driven by changes in the structure of the economy, the regulatory environment, and available infrastructure. Over the past several decades, Government investment priorities have also shifted to highway and airport construction rather than rail and port infrastructure that characterized the first half of the century. The resulting changes in market share show the degree to which both freight and passenger traffic have shifted to highway modes. Passenger Transport Market shares Freight Transport Market Shares 100% 100% Road Road 90% 90% Air Air 80% Water 80% Water % (of passenger-kilometers) Rail Rail 70% 70% % (of ton-kilometers) 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Road transport represented about 50% and rail 42% of passenger-kilometers in 1950. By 2000, road transport represented 96% and rail 2% of passenger kilometers. Similarly, road transport carried 22% and rail 72% of all Page 10  TURKISH STATE RAILWAY: OPTIONS FOR REFORM Structure of the Rail Sector in Turkey ton-kilometers in 1950. By 2000, road transport was responsible for 90% of freight ton-kilometers while rail was responsible for less than 6%. While current rail transport task is not insignificant, rail transport is certainly much less important to the economy of Turkey than in the past. 3.2 RAILWAY TRAFFIC CHARACTERISTICS While TCDD’s rail traffic market shares have declined significantly, since 1980, railway traffic has grown slowly. Overall, total TCDD railway traffic units11 have grown at about a 1% annual rate. TCDD’s Suburban services have lost traffic at about 3% per year, while its Railway Traffic 10,000 600 intercity passenger traffic has increased by about 1% per 9,000 500 year. 8,000 Pkm & Tkm (millions) Freight (tkm) 7,000 400 Freight traffic, measured in ton-kilometers, has increased Tons (m illions) Suburban (pkm) 6,000 5,000 Intercity (pkm) 300 about 2%. Measured in tons, the increase is about 1% per 4,000 Average Freight Haul year, indicating that average length of haul has grown 3,000 200 somewhat longer over the period. In fact, average haul 2,000 100 grew from about 425 kilometers in 1980 to 570 1,000 kilometers in 1990. It then declined to about 505 0 0 kilometers in 2001 (see chart at left). 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Over the same period, railway revenue received for transportation has declined by about 3.5% per year in real terms. Freight revenue showed the greatest decrease, declining at the alarming rate of 5% per year in real Revenue terms. Given generally increasing freight traffic volumes, 350 the drop in real freight revenue is significant. Freight 300 Suburban Intercity Revenue for suburban traffic showed the greatest 250 increase, going up by 3% per year over the period. This is $ (millions 2002) 200 of particular interest because suburban passenger- kilometers declined over the same period so the increase 150 in real revenue was achieved by increasing real tariffs at a 100 rate higher than the decline in ridership. Real main line or intercity passenger revenue also increased over the period, 50 by about 2% per year, about double the rate of increase 0 in volume, indicating real price increases, and increasing 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 ridership despite these real price increases. A review of real unit revenue for each service helps explain some of the changes in market size that TCDD has experienced, but raises a number of other questions. For example, real tariffs for suburban services Unit Revenue (real) increased more than 300% over the period, or about 6% per year. Ridership declined at a rate of about 3% per 0.060 Freight year. Based on the relationship between ridership and Suburban revenue, suburban traffic exhibits a price elasticity of at $ (2002) Per Tkm or Pkm 0.050 Intercity least –0.5% without accounting for exogenous growth. 0.040 Allowing for some growth in the external market over the 0.030 period, price elasticity is likely to be somewhat higher, say –0.7%. 0.020 0.010 A pattern of real suburban tariff increases and real declines in freight tariffs is highly unusual for government 0.000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 owned railways worldwide. It is much more normal for governments to heavily subsidize suburban traffic as a means to reduce traffic congestion and the cost of alternative modes of transport—e.g., road and subway construction. Istanbul, the largest TCDD suburban market, has a new light rail system and a subway planned. 11 Traffic units are defined as ton-kilometers of freight traffic + passenger-kilometers of passenger traffic. Page 11  TURKISH STATE RAILWAY: OPTIONS FOR REFORM Structure of the Rail Sector in Turkey The planned new subway system will connect eastern and western parts of Istanbul, running under the Bosporus at a significant cost. Pricing decisions for suburban services in Istanbul are made by a commission responsible for construction and operation of the light-rail and new subway systems. It is likely that prices have been increased to reduce the overall subsidy required for all forms of urban transport in the region. The decline in real freight unit-revenues ($ per ton-kilometer) is remarkable. Real freight tariffs have plunged more than 60% from $0.0352 per ton-kilometer in 1980 ($2002) to $0.0133 in 2000, a real rate of decline of TCDD Freight Commodity Shares 100% 90% 80% International 70% Chem, Fert, Petrol 60% Metals & Machinery Food and Agricultural 50% Construction Materials 40% Other Minerals & Ores 30% 20% 10% 0% 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 more than 4.5% per year. Several things can appear to drive freight rates lower while they have in fact remained constant—changes in traffic mix and increasing lengths of haul. Length of haul has increased on TCDD but not enough to cause the TCDD Freight Revenue Per Tkm 0.08 remarkable decrease in freight tariffs. A look at trends in the mix of TCDD’s freight traffic International Chem, Fert, Petrol shows some changes—the proportion of 0.07 Metals & Machinery international and Food & Agricultural Food and Agricultural 0.06 Construction Materials products have declined while Other Traffic has Other Minerals & Ores 0.05 increased. Overall, these changes are not very $ Constant 2002 0.04 significant and TCDD’s traffic mix in 2001 looks remarkably like its traffic mix in 1983. 0.03 Looking at the issue on a commodity basis, all 0.02 freight prices have been declining at similar 0.01 rates. Overall, unit-prices declined by about 60% over the period. Prices for “other” traffic 0.00 1983 1985 1987 1989 1991 1993 1995 declined the least, by about 25%, while tariffs 1997 1999 2001 for Food & Agricultural traffic declined the most, by about 62%. Prices for Minerals and Ores, the largest commodity group, declined by 61% over the period while other prices declined by 50% to 60%. In many ways, these price trends are remarkable. Most remarkable is that railway freight prices have been declining while passenger tariffs have been increasing. TCDD has had the curious policy of decreasing freight tariffs while increasing passenger tariffs, thus shifting relative government transport benefits from passengers, most likely poor, to major industrial concerns. It is also remarkable that freight prices declined while TCDD losses mounted year on year and the economy of Turkey was being adversely affected by excessive government spending, plunging the country into economic crises not once but twice. Next, it is also remarkable that while freight prices dropped, prices for suburban services increased substantially, driving demand to road transport and other modes, spurring the need for new and expensive transport investment. The monopoly pricing power of a national railway, one of the greatest fears of most governments relative to railways, has been strangely invisible, even in a time of national crises. Page 12 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Structure of the Rail Sector in Turkey Perhaps an explanation for the strange behavior of freight tariffs is that regulated pricing mechanisms rarely function well in times of high inflation. Price regulation always lags the real world. Permitting a state monopoly to have price increases greater than the rate of inflation is politically difficult and contrary to the incomes policies pursued by most governments whose economies are undergoing rapid inflation. Consequently, companies with heavily regulated prices are almost certain to have financial difficulties in conditions of rapid inflation. The fact that passenger transport prices have increased makes this explanation somewhat tenuous. 3.2 PHYSICAL CHARACTERISTICS TCDD operates a 10,900 track-kilometer railway network serving major cities in Turkey. The network consists of 8,257 kilometers of main line, of which 414 kilometers is double track (or more than double). The line is characterized by mountainous terrain, significant curvature (30% of the line is curved track with a radius of 1000 meters or less), and steep gradients (about 25% of the line is built with gradients of 1% or greater). The railway line has some 180-kilometers of tunnel and more than 24,000 bridges and structures. Most of the main line is signalized with CTC type signaling. About 20% of the main line network is electrified at 25 kV, 50 Hz. For the most part, the electrified network is in high-density passenger service areas and on the main line where heavier tonnage’s move. The extent of current signalized and electrified networks is shown in the map. Extensive expansion of electrification is planned. Plans are most advanced to electrify the lines already signaled. Further expansion of both signaling and electrification is also planned. TCDD Signalized and Electrified Networks 30° 35° 40° Russia Bulgaria Black Sea Georgia Zonguldak Istanbul Hydarpasa Samsun Greece Armenia 40° Bandirma Ankara Kirikkale Turkey Sivas Kars Kutahya Manisa Afyon Kayseri Iran Izmir Malatya Konya Narh Ulukisla Adana Mersin Iskenderun Iraq Syria Mediterranean Sea 35° Lebanon Most of the infrastructure is approved for axle loadings of 20 metric tons. Rail is both jointed and welded rail, about 80% of 46-kg/meter or greater (about 60% of the rail is 50-kg/meter). About 60% of the line is built with concrete sleepers, wooden sleepers are used in another 26%, the remainder uses steel sleepers. TCDD is generally well constructed for the traffic it carries. TCDD’s network is mostly a light density network (measured in million traffic units per kilometer—mtu/km). Average density is less than 2 mtu/km. The highest network density occurs in commuter territories near Istanbul and Ankara; the highest density, 26 mtu/km, is in suburban territory in Istanbul. Suburban lines where the greatest densities occur are at least double track with reverse running signaling. Train densities are highest in these areas as well, between 150 and 300 total trains-per-day in Istanbul and about 150 total trains- per-day in Ankara. While some suburban trains are operated in other cities (e.g., near Izmir) train densities are Page 13 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Structure of the Rail Sector in Turkey much lower (in Izmir train densities are on the order of 24 per day). The map below shows combined freight and passenger densities over the network. TCDD Freight and Passenger Traffic 30° 35° Density Black Sea 40° Russia Bulgaria Georgia Zonguldak 15 Istanbul 22 14 12 Hydarpasa 23 Samsun Greece 13 01 59 11 02 03 21 55 58 Armenia 54 Kars 40° Bandirma 40 04 05 Ankara 19 Kirikkale Turkey Sivas 57 08 17 16 18 51 56 07 06 20 52 24 53 60 39 10 09 89 87 38 Kutahya 88 62 Manisa 86 Afyon Iran 26 61 68 63 28 41 70 37 36 29 43 30 Izmir Kayseri Malatya 67 31 71 64 37 50 25 Narli 90 44 Konya 65 66 49 35 42 45 Adana 80 48 46 72 73 78 79 Batman 82 76 83 85 Ulukisla 75 77 81 NA 84 74 Mersin Iskenderun Iraq Syria Mediterranean Sea Million Traffic Units per Kilometer 25 20 15 10 35° Lebanon 5 1 Freight operations are focused on a very few major industrial areas and facilities. Most traffic density is associated with an iron ore mine east of Sivas (on the line to Kars), a steel mill north of Kirikkale, on the line to Zonguldak, and the port of Iskenderun. Mersin is a secondary port. The map below shows freight flows only, the scale of the map has been adjusted to provide more discrimination for major freight flows. TCDD Freight Only Traffic Density 30° 35° 40° Russia Bulgaria Black Sea Georgia Zonguldak 15 Istanbul 22 14 12 Hydarpasa 23 Samsun Greece 13 11 01 59 02 03 21 55 58 Armenia 54 Kars 40° Bandirma 40 08 07 04 05 Ank 1 a 9 ra 17 Kirikkale T S u ivas rkey 57 51 161820 52 53 60 56 39 06 24 88 09 10 87 38 Kutahya 89 62 Manisa 86 Afyon 26 29 28 41 37 36 43 61 63 68 70 Iran 30 Izmir Kayseri Ma latya 67 31 71 64 32 50 25 Narli 69 90 44 Konya 80 65 66 49 35 42 45 Adana 79 48 46 72 73 76 78 Batman 82 83 85 Ulukisla 77 81 NA 84 74 75 Mersin Iskenderun Iraq Syria MediterraneanSea M P illio erK n -G ilom ro e ss ter -Tons 8 6 4 2 35° Lebanon 10 .5 The map also shows light density lines (shown in red) that have been specifically subsidized by the Government of Turkey as authorized by legislation passed in 1976. In addition to these lines, the Government also subsidizes some specific loss making services. It should be noted that it is not likely that any TCDD lines carry profitable traffic. On average, in 2001, TCDD earned revenue of $6.70 and incurred direct expenses of $26.80 for each ton of freight transported; for each mainline passenger, TCDD received $2 but spent $10. Page 14  TURKISH STATE RAILWAY: OPTIONS FOR REFORM Structure of the Rail Sector in Turkey TCDD’s railway infrastructure is generally in good condition. When infrastructure condition deteriorates, track maintenance forces place speed restrictions on areas in poor or unsafe condition to reduce the likelihood of derailment and accident. When railways do not have sufficient funds to pursue adequate track and Infrastructure Condition infrastructure maintenance and renewal 3000 activities, the number of such speed restrictions tends to increase. If track maintenance remains 2500 at too low a level, the number of derailments and accidents increases. Number of Speed Restrictions 2000 On TCDD, speed restrictions and accidents are 1500 both generally declining. The chart shows that temporary speed restrictions increased in recent years. The number of kilometers of track 1000 renewals and track work increased significantly Total in 1997 and 1998, explaining the increase in 500 Temporary temporary speed restrictions and the decline in Permanent permanent ones. A review of TCDD railway Accidents & Derailments 0 accident statistics shows that derailments are 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 generally declining while level crossing accidents are increasing somewhat. Overall, there is no indication that TCDD infrastructure is suffering from under-investment. On the contrary, the evidence indicates that TCDD track condition is improving overall. 3.3 STRUCTURE OF TCDD The Republic of Turkey General Directorate of State Railways Administration, or TCDD, functions in railway and port sectors to: • Operate, construct, renew and maintain railways, ports and piers “delivered to it by the state” • Direct affiliated companies within approved budgets and programs • Manufacture rolling stock, set up warehouses, depots and passenger facilities • Undertake railway construction projects in Turkey and abroad • Conduct activities complementary to rail transport, for example, maritime and land transport including ferry operations. • Undertake other tasks assigned by the Council of Ministers related to its field of activities TCDD is a State Economic Enterprise (SEE). There are two types of State Economic Enterprise; TCDD is a State Economic Organization, an SEE, established to provide a monopoly service. Under existing law, TCDD has monopoly rights in the transport of passenger and freight by railway (though not by water). Under existing law, private sector participation in the rail sector (including suburban and intercity passenger transport as well as freight transport) can only be by concession from TCDD.12 TCDD is managed by a Board of Directors, which has six members. They include the managing director of TCDD, two members appointed by the ministry of Transport, one by the Ministry of Treasury, and two appointed by recommendation of the Ministry of Transport and selection of the Deputy General Managers of TCDD. The managing director is recommended by the Ministry of Transport but approved by the elected central government. In many ways, this Board Structure is very inward looking—appointed by government employees, representing the railway—the only different view would come from the single Finance representative. The Board of Directors is largely composed of individuals interested in government investment in railway and port infrastructure. 12Istanbul operates a light rail system. While this system does not share infrastructure with TCDD, it is not clear how such a system operates within TCDD’s monopoly mandate. A subway operating under the Bosporus is planned. While TCDD is involved in the planning for the subway, current plans call for a municipal organization. Page 15 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Structure of the Rail Sector in Turkey TCDD owns and operates three affiliated companies: • Tulomsas: Responsible for manufacture of locomotives under license, • Tuvasas: Responsible for manufactures of passenger coaches; and • Tudemsas: Responsible for freight wagon manufacture. These companies share TCDD’s monopoly rights and are the only companies authorized to provide such services to the government of Turkey. TCDD says that a few years ago it approached the Government’s privatization agency to privatize these companies along with several other manufacturing facilities operated by the railway. The privatization agency refused to handle the privatization and returned the portfolio to TCDD. Current law does not permit TCDD to sell these companies outright, though it can sell a concession to operate them. In addition to these affiliated companies, TCDD operates several factories from within the Permanent Way Directorate. These include a switch making factor, two sleeper-manufacturing facilities, and a rail welding plant. The management of TCDD has considered restructuring these facilities as joint venture partnerships but is prohibited from selling or privatizing them under current the current legal framework. A new railway transport law has been prepared by TCDD and a draft version of this law is now with the Ministry of Transport for review. The new law would further integrate the affiliated companies into TCDD (now nominally part of TCDD but report to the Ministry of Transport organizationally), but may also provide TCDD with greater ability to privatize these and other properties 3.4 TCDD STAFF TCDD employs about 46,000 staff. Of this amount, about 5,900 are employed at TCDD ports; and another 5,900 are employed at affiliated companies. Some restructuring programs would separate ports and affiliated companies from TCDD; this would reduce employment by nearly 12,000. Railway employment is largest in the operating departments—permanent way, movement, traction and installation departments. The permanent way department is responsible for maintaining the railway’s civil works—tracks, bridges, tunnels, buildings and other structures. Permanent way activities are distributed throughout the TCDD system. Similarly, the Traction department is responsible for operating and servicing TCDD Staffing (April 2002) Workers railway locomotives. Drivers, mechanics, Directorate or Unit Officer Contract Permanent Temporary Total service employees make up the bulk of Board, Inspectorate, Others I Permanent Way 127 93 166 2,172 4 5,220 - 1,372 297 8,857 this group of employees. The II Traction 143 4,344 4,625 36 9,148 Movement department is responsible III Commercial IV Finance 97 38 804 331 292 - - 18 1,211 369 for customer contact activities at V Movement 124 6,221 395 2 6,742 stations and trains, and for organizing VI Health VIII Personnel 35 266 821 627 - 9 - - 865 893 trains, shunting wagons and coaches in IX Purchasing 41 239 127 - 407 terminals. The Installations department X Legal XV Training 13 30 76 188 - - - - 89 218 is responsible for designing, operating, XVI Installation 52 1,025 1,024 262 2,363 and maintaining signaling and XVII Data Processing XVIII Real Estate 9 27 114 100 - - - - 123 127 communications systems; providing Security Unit 1 2,206 - - 2,207 dispatching services for train Ports Affiliated Companies 72 256 1,387 961 4,149 3,512 252 1,157 5,860 5,886 operations. TDCC Total TCDD Regional 1,424 604 21,782 17,067 19,357 10,291 3,099 1,665 Across all TCDD departments, central 45,662 29,627 Region as % of Total 42% 78% 53% 54% headquarters staff totals about 10,000, 65% or 22% of total employment, a very high percentage for a commercial railway. TCDD also has a regional structure, with most departments represented at each of seven regional headquarters as well as the central headquarters. Regional groups report departmentally to the regional headquarters, receiving advice, standards guidance, and budget information from headquarters departments. This structure gives regional offices a Page 16  TURKISH STATE RAILWAY: OPTIONS FOR REFORM Structure of the Rail Sector in Turkey significant amount of autonomy and reduces the time required for decision-making, but results in a very large management structure with many reporting functions duplicated across several regions. Additionally, it almost guarantees that regional offices will become politicized. Many entities of the Turkish Government are organized in this manner, increasing overall staff sizes and the amount of political influence at local levels. Recently, this regional structure has been changed by government decree. As a part of the overall economic program agreed with the IMF, the Government of Turkey determined that regional structures must be dismantled to reduce government expenditures. TCDD plans to comply with the decree by eliminating the position of regional director and centralizing the reporting lines of the various directorates. While complying with the decree will reduce staffing slightly, it will not make a significant difference in overall TCDD staff levels. Personnel issues have been of concern to TCDD for some time. While traffic units have increased slightly over the decade, overall employment levels have declined by about 20%. Officers of TCDD are civil servants Total TCDD Staff and protected by many rules governing civil 60,000 service employment. Essentially, while civil servants serve at the pleasure of their ministry, 50,000 they cannot be fired except for gross dereliction of duty or criminal offenses. Therefore, reducing 40,000 officer level employment is very difficult. TCDD has imposed a hiring freeze on officer level 30,000 positions for some time. This has given rise to an increase in the number of contract employees 20,000 used at the railway. While the railway has more flexibility in determining how to deal with excess 10,000 contract employees, they, too, are covered by many civil service rules. TCDD reports that 0 officers are appointed by the Ministry from the 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 pool of available civil servants. Often officers with no railway or technical experience are appointed to high level positions. Skilled trades employees are protected by labor unions and agreements that limit the ability of management to eliminate employees. A number of skilled trades staff are hired on a temporary basis, similar to contract employees, giving TCDD somewhat more flexibility in dealing with excess employees. TCDD management has reviewed its employment structure and developed a restructuring proposal calling for staff reductions of some 10,000 employees, or about 25%. Most of this reduction is from the separation of non-core functions, including separation of some affiliated companies and privatization of manufacturing facilities within other parts of TCDD. Since many of these employees are protected either by civil service rules or by labor agreements, it will be difficult to reduce the number of government employees quickly. Either changes in law or some form of voluntary employee buyout is likely to be necessary. 3.5 SUMMARY Transport in Turkey has grown beyond the railway. Rail market shares have declined so much that the railway is almost irrelevant to the economy—except for the high cost of the institution itself. It is not likely that much new traffic can be attracted to the railway without significant investment in new and very expensive railway infrastructure, or major changes in railway service. In the past, it was argued that the railway could be more competitive and commercial if it reduced its cost structure. This argument can no longer be made. Over the past 20 years, TCDD has significantly reduced its freight tariffs. Low tariffs, set at levels of the most efficient railways in the world, have not helped TCDD attract new traffic. Over the same period, TCDD has Page 17 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Structure of the Rail Sector in Turkey not reduced its cost structure at the same rate as its prices and now generates very large loses. To become a commercial enterprise, the railway will have to be radically reduced in size, service improved, and prices increased. TCDD management has prepared a new transport law to facilitate the changes needed to improve the efficiency and effectiveness of the railway and to assist in restructuring the railway sector. The provisions of this law are and alternative reform strategies are discussed in the next chapter. Page 18 IV RAILWAY LAW AND TCDD REFORM STRATEGIES 4.1 NEW RAILWAY MANAGEMENT LAW T he issue that TCDD and the government of Turkey must resolve is how much the government will spend to subsidize railway transport. TCDD would like that answer to be bigger; the Government of Turkey may be looking for a lower cost solution. Changes in the legislative framework supporting TCDD and railway transport are required to permit significant restructuring and further reform. TCDD has prepared a draft law on Railway Management designed to permit much greater flexibility in the transformation and restructuring of the railway. 4.1.1 Legal Structures The proposed new law establishes TCDD as an autonomous limited liability enterprise operating commercially but remaining a part of the Ministry of Transport. It is our understanding that the phrase “operated in accordance with commercial rules” implies that the enterprise is designed to operate profitably, considering subsidies provided by government as revenue for services provided under contracted agreement. Under the new law, the enterprise would be responsible for operating the railway lines, trains, ports, and other facilities assigned to it by the State. It would be established as the monopoly supplier of railways, ports, harbors, so assigned. The law gives the enterprise new authority to lease out property it does not require for operating purposes, a possibility that is difficult under existing law. Some important differences between the new law and existing legislation involve appointments to the board of directors. In the new law, seven board members would be appointed:13 • One member from the Ministry of Transport, appointed by the Ministry; • One member from the private sector, appointed by the Ministry of Transport; • One member from the Undersecretariat of the Treasury, appointed by the Ministry responsible for the Undersecretariat of the Treasury; • One member from the State Planning Organization, appointed by the Ministry responsible for the State Planning Organization; • Two members from the Assistant General Directors of TCDD, proposed by the Ministry of Transportation but agreed by the Assistant General Directors;14 and • The General Director of TCDD, who will be Chairman of the Board of Directors. The General Director is jointly appointed by the Ministry of Transport and the board of directors. In the current organization, TCDD is supervised by a five-member board of directors and the President. The President and two board members are appointed by the Ministry of Transportation, one member by the Ministry responsible for the Undersecretariat of the Treasury, and the remaining two members are jointly appointed by the Minister of Transportation and selected by the Deputy General Managers of TCDD. 13Section 3, Article 7, Draft Railway Management Law 14Evidently, some association of Deputy General Directors, or senior officers of TCDD will vet and approve the appointments. This is similar to the existing requirement where two board members are selected by the Deputy General Managers of TCDD and appointed by the Minister of Transportation. Page 19 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies An issue that has been of concern within TCDD management is the relative inexperience of many civil servant officers and board members who have been appointed to railway service. Currently, senior officers are appointed by the government and may come from other agencies; there is no requirement for transport or railway experience. Specific qualification standards are important elements of the new law. • The qualifications necessary for appointment as a state official (civil service qualifications); • Five years experience (experience in what is not defined); and, • Of an age within the limits covered by the civil service qualifications. The new law expands the board of directors and specifically puts a representative from the private sector on the board. However, in substance the proposed new board of directors seems little changed from the prior board. In addition, the new law provides for appointment of senior officers by the General Director rather than by the Ministry, a significant difference from current law, though perhaps not much of a difference from current practice.15 The new law does not propose removing TCDD officers from the civil service roles or changing civil service conditions associated with employment as a senior officer of a governmental agency. 4.1.2 Organization Structures The new railway management law also changes TCDD’s management and organization structure. The new law establishes the main units of TCDD as:16 1. Department of Goods Transportation 2. Department of Passenger Transportation 3. Department of Ports 4. Supporting Department of Infrastructure 5. Supporting Department of Depots and Workshops (Ateliers) 6. Counseling Unit of the President of the Auditing Board 7. Legal Consultancy Unit 8. Defense Secretariat 9. Auxiliary Unit for Research, Planning, and Coordination 10. Auxiliary Unit for Human Resources 11. Auxiliary Unit for Financial Affairs 12. Agency Relations Auxiliary Unit 13. Information Systems Auxiliary Unit 14. Supplies Department 15. Protection and Security Directorate Differences between the proposed and existing structure are primarily in the formation of business unit departments for Goods and Passenger Transport. The new structure also includes an Infrastructure Department, which subsumes the old permanent way and installations functions and portions of several other departments. Its new activities include track maintenance, construction, signaling, communications, electrification, and dispatching, train control and planning functions. This consolidates several different directorates into one organizational structure and is generally in agreement with the types of structures encouraged by the European Union. There appears to be no mention of rolling stock, either wagons or locomotives, in the draft law.17 It is unclear what organization element will have responsibility for locomotives, drivers, and rolling stock. Some senior managers thought that the goods and passenger departments would be responsible for rolling stock and drivers involved in providing their respective services. Others senior officers insisted that management of 15 It is not likely that the government would appoint a senior officer to TCDD service in opposition to the wishes of the General Director, though it is possible. It should be noted that even experienced appointees can be unsuccessful. 16 See Section 3, Article 9 of Draft Railway Management Law 17 According to translation of the draft law received from the Research and Planning Department on April 30, 2002. Page 20 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies rolling stock and drivers would remain the responsibility of a central department. Presently, while not all the details have been determined, it is clear that TCDD is beginning to change its organization structure to reflect a more business-like approach. For example, the Commercial Department, currently responsible for planning, setting tariffs, and marketing activities for both passenger and freight services, is in the process of becoming the Passenger Department. After restructuring, the new passenger department will be responsible for all passenger activities including scheduling, planning, on-board services, sleeper and catering services, and operation of passenger stations. Responsibilities, functions, and staff levels in the department will change significantly. In the past, the Movement Department, responsible for operating trains, stations and shunting facilities, employed some 7,000 staff at all levels. The Movement Department is currently being reorganized to become the new Freight Department with a staff of about 600 personnel. Other staff will be transferred within TCDD to other departments. The deputy director of this new department believes that locomotives, drivers, and wagons will be in a rolling stock department while shunting services will become part of the new Infrastructure Department. The new Freight Department will be responsible for setting tariffs, freight marketing activities, studying demand, interfacing with customers, and developing a train plan for freight. The Permanent Way Department is not yet making organizational changes in preparation for TCDD’s proposed restructuring. However, shunting activities and the staff and responsibility for terminals and stations, will be transferred to the Installations Department, which will become one of the essential components of the Infrastructure Directorate. 4.1.3 Financial Management and Subsidy Issues The new draft law specifically states that TCDD is to be managed autonomously and that it must be financially balanced with productivity and profitability as the basis for management action.18 The proposed law specifically permits TCDD to contract, lease in or out, and to manage its property and affairs generally as a commercial enterprise. Importantly, the new law provides the basis for TCDD to transfer operating rights to other public or private entities (but not to form monopolies, though how these might be defined is unclear) for periods as long as 29 years. The new law has some surprising provisions which give TCDD unprecedented financial protection. TCDD determines its tariffs autonomously. If the state should wish to have lower tariffs or discounts for any customer class, the state must pay the difference between TCDD’s tariffs and the discounted rate. TCDD determines the lines and services it is to operate and those it will discontinue. The state may wish to have some lines retained and services continued and is responsible for providing the necessary support. Should the state not provide the necessary support, TCDD can withdraw service. TCDD determines the staffing required to provide the services it determines it should run and the state is responsible for any excess staff. TCDD prepares estimates of its infrastructure investment needs and submits a five-year budget to the government, which is obligated to provide the funding.19 The law also requires that the state fund all infrastructure maintenance and repair expenses. Government funds must be paid a year in advance. Finally, the government is prohibited from making any disposition of railway property without railway approval.20 This is an extraordinarily generous law for TCDD management. The law provides neither commercial risk nor any pressure for financial discipline. There is no provision ensuring that the state receives value for money— no monitoring; no financial performance measurement; no provision for the state to decide that it doesn’t want to make some investments.21 Under the proposed law, the state pays for what TCDD management wants. 18 Draft Law, Section 4 Article 10 19 Draft Law, Section 8, Article 34 20 Draft Law, Section 8, Article 40 21 While the law provides that the state shall provide the funding determined as needed by TCDD, one would expect some debate about infrastructure investments. However, the law does not provide any leeway for the state in enhancing existing infrastructure. If TCDD determines that a line must be double tracked, electrified or signaled the state must fund it. Page 21 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies 4.1.4 Other Provisions of the Law A provisional article in the draft law (Provisional article 5) reincorporates affiliated companies (Tüdemsaş, Tüvasaş, and Tülomsaş) into TDCC and makes them directorates of the railway. It is unclear whether these industries still have monopoly rights on their products in Turkey but it is even less likely that TCDD would use competitive bidding for the output of these companies. The new law is silent on safety regulation or on what happens to TCDD’s current inspectorate directorate. While the law permits TCDD to lease equipment, to design rail infrastructure, and to acquire train control equipment, it appears that the standard to which the infrastructure performs is entirely up to TCDD management. The law permits concessioning of railway and port operations at TCDD’s discretion. TCDD earns any income produced by such concessioning. TCDD is in complete control of railway services and lines, determining what network to operate and setting tariffs with complete freedom. There is no commercial pressure on the railway except that which might be provided by competition from other transport modes or sources and substitution. 4.1.5 Recommendations on Railway Law TCDD’s draft version of the railway law has many very good provisions—it reduces political influences on the railway; permits concessioning; restructures the railway into more focused business units; provides greater tariff setting flexibility; potentially engenders more commercial behavior and management practice. However, the draft law puts investment, operation, and management of railways in Turkey completely in the hands of TCDD management and leaves the government with all the commercial risk but no power to limit or control railway spending. The law generates little pressure to provide value-for-money and provides no financial guidance to railway management. Further, the law establishes TCDD as service provider, safety regulator, price regulator, and sole contractor of railway services. Rail has become such a small part of the Turkish transport picture that abandonment of the railway entirely to its own control may not be of great concern. However, doing this while giving railway management a blank check could be very expensive. While current management may be focused on more efficient commercial operation, this law does not require it and it leaves the government subject to funding whatever railway management puts in its budget.22 TCDD is currently very expensive; under the draft law; it could be come even more so. Turkey would benefit from some modifications in the law. First would be to ensure some measurement of value for money. This in part could come from a requirement to compare TCDD performance with similar international railway companies. Productivity, operating costs, physical measures such as density, asset productivity, and employment productivity are some of the measures that should be regularly monitored. A further requirement would be to conduct a more detailed benchmarking analysis each five years or so. This analysis would compare the performance of freight, intercity passenger, and commuter rail services to the best railways in the world in each area, and identify root causes for any differences. This kind of analysis can help guide investment policy and provide a basis for measurement of return on railway investment. Finally, measurement of return on investment should be introduced into TCDD investment policy. The government shareholder should require return on investment and alternatives analysis for all major investments. Next, ports, manufacturing facilities, non-specialized construction functions, and other non-core railway activities should be separated from TCDD. Turkey has a number of private ports; there is no reason to continue to require government ownership of these important assets. Competition is likely to put downward pressure on the tariffs charged by ports and privatization of the ports will put more of the commercial risk in the private sector. Separation of ports will provide multiple benefits to the economy: reduced tariffs by at least 20%,23 shift commercial risks associated with port investments, and enhanced competition. Separation of other assets, particularly railway manufacturing capabilities, also provides multiple benefits. Separation will 22 Budgets and spending plans must be approved by the TCDD board of directors. However, replacing board members to control operating and investment budgets is not an efficient control mechanism. 23 Privatization of the ports would likely reduce port charges further —on the order of 40% below current prices. Page 22 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies allow TCDD to seek competitive bids for products throughout the very competitive European and global railway markets. Our experience with competitive bidding is that competitive prices are lower than non- competitive prices by at least 20 to 30 percent. Privatization of these facilities also puts their associated commercial risks in the private sector. Finally, separation of other non-core activities reduces TCDD capital requirements and allows the railway to enjoy the benefits of private capital spent to improve the competitiveness and efficiency of these non-core assets without having to modernize the facilities at its own cost. The law should encourage the transfer of some of the costs for suburban passenger services to local communities. In the process, it should also transfer some control over those costs and service levels. Local concessioning of transport services should be encouraged and the law should provide the means for private operators to manage infrastructure and control operations on these local lines. The government should also consider eliminating the TCDD monopoly franchise for freight services as well. EU membership will require that other railway entities be able to operate over TCDD trackage eventually in any event. The reduced TCDD should be corporatized and given a true commercial mission. Regulatory issues should be separated from railway operation and administration. Given railway freight market shares, Government should not regulate freight tariffs at all. The railway inspectorate should become a function of the Ministry of Transport rather than a part of the railway administration. The law should also form an office or function in the Ministry of Transport responsible for oversight and managing government spending for railway investment and operating services. This office would be responsible for contracting for railway services required by the government. Thus, the operation of subsidized services could be by competitive bidding for those services. 4.2 TCDD’S FIVE YEAR RESTRUCTURING PROGRAM The Research and Planning Department has prepared a restructuring program for TCDD that differs somewhat from the proposed law. The Restructuring Program appears to be much more radical than the draft law. The aim of the restructuring program appears to be to convert TCDD from a government agency more concerned about public services than profit-and-loss into a commercial entity oriented towards operating only commercially viable transport services. In this conception of TCDD, government is a customer and relations between railway and government are based on commercial principals and contracts. 4.2.1 Restructured Organization The restructuring program also aims to separate non-core businesses such as ports, health and training services, manufacturing facilities and the three affiliated companies from the railways. This restructuring is coupled with organizational changes within TCDD similar to but more streamlined than those contained in the railway management law. Four business units would be formed: Freight, Passenger, Infrastructure, and Workshops units. In addition, a small corporate services unit would provide planning, human resources, legal, accounting, IT, and other centralized services. This structure supports the accounting separation of infrastructure from the rest of the railway and facilitates Turkey’s entry into the European Union. Coupled with its more commercial focus, the Restructuring Program spells out, in broad terms, the kinds of changes expected: • Elimination of TCDD operated manufacturing, including privatization of Tüdemsaş, Tüvasaş, and Tülomsaş; • Much reduced operation of main line passenger services; • Abandonment of uneconomic lines, trains and services; • Only commercially viable trains or trains supported by national, regional, or local governments will be operated, • Abandonment of express and loose parcel businesses; • Freight services which favor blocked or direct trains • Increased cooperation with local authorities for suburban services; perhaps even transfer of suburban service responsibilities to municipal authorities; Page 23 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies • Increased tariffs and reduced costs to improve profitability. Under the restructuring program, TCDD would pursue expanded public/private and national/local financing programs, encouraging private ownership of freight wagons, and local participation in commuter and suburban passenger services. In addition, it would expose more of its own activities to market place competition by outsourcing renewal and maintenance activities, purchasing services externally rather than self- providing them. 4.2.2 Improvement Strategies The restructuring plan proposes a series of strategies to improve the efficiency and reduce the cost of railway operations. Some of these strategies require investment while others require changes in law. In summary: Strategy Investment Profit Impact Description $million $million Freight Services: $60 $192 Transition to Block Trains - $25 Implementation started Longer and Heavier Trains $40 $20 Investment in infrastructure, couplers Operations Information System $20 $22 Revised specifications to increase bidders Expand International Transport - $15 Silk route, Tashkent Mersin containers Improved Freight Wagons - $110 Passenger Services: $105 $107 Cancel Uneconomic Trains - $53 66 trains cancelled in 2001, 64 under study, current savings estimated as $5.5 million Cancel Discount Tickets - $10 Require government to fund discounts Decrease Ticketless Travel - $1 Increased security, new fare machines Increase Service Quality $75 $13 5 new high speed trainsets, 4 EMUs New Equipment for Suburban $30 $3 EIB to provide funding Government to Subsidize Service - $27 Requires change in Law Infrastructure Services $20 $60 Mechanize Track Maintenance $20 $30 Implementation scheduled for 2003 Close Special Workshops - $5 Some workshops shifting to Rolling stock Contract for Renewal Services - $15 Use of contractors for track maintenance Convert Factories into Partnerships - $10 Strategy assumes TCDD retains 50% Rolling Stock $240 $79 Replace Aging Equipment $240 $79 71 diesel and 23 electrics underway Decrease Servicing Depots - - Under study Improve Maintenance Quality - - Under study Ports $65 $44 Improve Productivity $65 $20 Cranes & on-dock equipment, EIB funding Changes in Labor Agreement - $24 Change work practices for better productivity Human Resources $75 $155 Hire Personnel in Shortage ? ? About 3,000 employees, impact uncertain Reduce Redundant Employees $75 $125 Eliminate employees, funded by World Bank Transfer Security Employees - $30 Requires change in law Total ~$565 $637 The strategies are reasonable efforts at improving productivity and some of the investments may be economically beneficial. However, they do not appear to be a fully integrated restructuring strategy. Some of the strategies would appear to solve a problem that another strategy (and often an investment) is designed to solve but these interrelationships do not appear to be taken into account.24 24Full study papers were not presented to the study team, nor did the team have the opportunity to review a full five-year integrated strategic plan. Page 24 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies For example, one part of the strategy calls for a significant reduction in the number of passenger trains operated.25 The strategy and the law suggest that TCDD will seek specific subsidies for light density lines and expects to close some of those lines. A reduction in network size, closure of stations, and elimination of a number of trains will release a number of employees in categories now in short supply. Yet, the strategy calls for hiring some 3,000 employees to fill shortage positions. Infrastructure Services shows no savings associated with reductions in trackage. Finally, the documents we reviewed did not include integrated financial results so the overall impact on TCDD’s costs could not be evaluated. The Freight Services strategy to run block and unit trains should result in a significant reduction in terminal shunting services, those impacts on infrastructure costs also are not clear. The operation of longer and heavier trains, elimination of a number of passenger and freight services and the potential reduction in network size requires an integrated analysis of railway traffic and operations. The use of a network simulation model coupled with a financial analysis model is needed to develop detailed plans. The proposed operating changes can have a large impact on line capacity, requirements for train control and signaling systems, terminal and shunting facilities and services, and the need for double tracking or lengthening sidings. TCDD does not have such tools available. Finally, the analyses available for review did not include any significant integrated financial information. 4.2.3 Staffing Implications In an effort to reduce costs and improve efficiency, TCDD has imposed a hiring freeze for some years. The freeze has left the railway with a shortage of some 3,000 employees (including assistant conductor, assistant departure officer, conductor, wagon technician, rail and crossing guards). The shortage has resulted in the elimination of some goods trains and closing of some stations during various periods of the day. Even so, TCDD’s management has concluded that it can reduce employment by about 25% or about 10,000 positions. While restructuring plans are somewhat vague, some officers reported that the staff reductions would come from elimination of ports, the three affiliated companies (Tüdemsaş, Tüvasaş, and Tülomsaş) as well as TCDD manufacturing sleeper, switch, and welded rail manufacturing capabilities. Taking recent staffing counts,26 elimination of these units from TCDD would involve some 12,200 employees. However, separating these units from TCDD will not change overall government employment responsibilities unless the units are privatized or closed. It should be noted that removal of ports from TCDD’s responsibility will increase cash requirements because the ports have been generating a cash contribution of nearly $100-million in recent years. TCDD has estimated that the staff reduction will save about $125-million per year. In a related issue, the restructuring plan discusses the potential for elimination of the railways security personnel (about 2,200 employees). It is required, under current legislation,27 to provide for the security of TCDD facilities and services. The agency argues that such services are provided by state security forces for other modes and should not be TCDD’s responsibility. Transfer of these employees would reduce TCDD staffing but may not reduce overall state employment rolls unless transport security duties are picked up by existing state security forces without the extra staff. 4.2.4 Financial Implications of TCDD’s Restructuring Plan The restructuring program is supported by investment in new information systems—Financial and Operational management information systems—as well as a number of other investments. The Restructuring 25 The 66 trains canceled in 2001 resulted in savings of about $5.5 million; total savings of $53-million anticipated suggesting that some 600 trains will be cancelled. 26 See Section 3.4, page 12. 27 Law No 2495 according to the restructuring plan. Page 25 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies plan calls for investments averaging about $160-million annually.28 A redundancy program costing about $75- million is anticipated. It is expected that the government will pick up the cost of the redundancy program and assume responsibility for any other excess staff. In addition, the government is expected to defer payment of social security obligations by about $30-million per year and finance exceptional restructuring costs averaging about $10 million per year for the first five years. Finally, the government is expected to provide loans or loan guarantees of about $200-million per year. These are significant costs, totaling $400-million per year, not including the one-time $75-million cost of the redundancy program (but, less than current costs of about $800-million per year). Discussion with many TCDD senior officers reveals that they expect a significant increase in government capital funding associated with the new law, restructuring, and preparations to joining the EU.29 These new funds would be used to increase speeds, extend electrification, and increase line capacity by double tracking some lines. TCDD’s permanent way department has established new standards for express train trackage calling for minimum radius curvature of 5000 meters,30 centralized train signaling with automatic stop, double track, and electrification. An example of the program is the work currently underway between Ankara and Eskişehir: the line is being double tracked and curves eased to permit 160-kph operation. When this work is completed, the permanent way department expects to tackle the mountainous line between Eskişehir and Arifiye so to complete a high-speed line between Istanbul and Ankara. Also in its plans are extension of electrification east of Ankara. The railway has estimated its capital needs at $160-million per year in the restructuring plan but its strategy in prior years called for investments of about $245-million, of which, government funded about $110-million. The plan for this year is for $240-million. It is unclear what the proposed $160-million investment program includes. While the restructuring program does not show financial performance in detail, it appears that the restructuring plan, like the draft law, assumes that the government will fund all infrastructure maintenance and renewal expenses as well as TCDD’s capital program. The mechanism assumed for such funding is not entirely clear. In the draft law, the mechanism is submission of a budget and board-approved capital program. Under the restructuring plan, the mechanism is an annual contract with specified investment programs and specific subsidies for services and “uneconomic lines”. The restructuring plan does not clearly show that Government pays infrastructure maintenance and renewal costs, or what portion of such costs is paid by customers. Should the financing mechanism be based upon the draft law, TCDD management would prepare a strategic plan and five year capital budget for the approval of the Board of Directors. Once approved, the capital requirements would be passed to the various planning agencies and the Ministry of Transport and the government would be obligated to fund the capital program. 28 TCDD prepared document entitled “TCDD’s 5-Year Restructuring Programme” describes a capital investment requirement of about $120-million per year on page 7 but $160-million on page 9. The higher figure is assumed. 29 TCDD management’s general observation is that government is spending too much on road construction, not enough to improve railway infrastructure. They also see significant state spending for rail transport in EU countries and anticipate that adjustment funds for railway infrastructure improvements will flow to TCDD. 30 About 35% of all TCDD lines, about 3,000 kilometers of track, are curves of less than 2000-meter radius. Page 26 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies 4.3 TCDD’S RAILWAY NETWORK A defining characteristic of TCDD’s railway network is its very low overall density. At about 1.9 million traffic- units-per-kilometer, it is among the lowest of countries in the region. Such low densities tend to reduce the utility of a railway, which depends upon density and volume to economically compensate for the special-use nature of its infrastructure. TCDD’s railway losses are massive and it is likely that there are few, if any lines that cover their operating, maintenance, and renewal costs. Network Density 10,000 8,000 Traffic UnitsPer Kilometer (million) 6,000 4,000 2,000 0 Au ly Sl ech Bu ain Hu ey Ge ce B tria Tu e Fr d e ite ort d th ium Sp y Ita Po ia Fi en De nia Sw ria Sl ark Ki gal Cz a y c n in P an ar rk an Gr ia an Ukds ak i ee an la s ed ra a ng u nm e n Ne elg nl rm m lg n ov ov om do la do ce er R ng Ma d Un This issue is not a new one and has been addressed by the railway and government in the past. In 1976, the government and railway identified light density lines for specific government subsidy. The lines shown in red in the map below continue to be specifically subsidized as light density lines. TCDD Specifically Subsidized Lines 30° 35° 40° Russia Bulgaria Black Sea Georgia Zongul dak 15 Istanbul 22 14 12 Hydarpasa 23 Samsun Greece 13 59 11 01 02 03 21 55 58 Armenia Turkey 54 04 Kars Bandi rma Ankara 57 40° 40 05 19 17 16 18 20 Ki rikkal e Si vas 08 51 56 07 06 52 39 24 53 60 09 10 87 89 38 Kutahya 88 62 Mani sa 86 Afyon Iran 26 61 63 68 28 41 37 70 36 29 43 Kayseri Mal atya 30 31 Izmi r 71 64 67 37 25 50 90 42 44 Konya Narh 80 65 66 35 49 72 79 45 46 78 48 73 Ul uki sl a Adana 76 82 83 85 Mersi n 75 77 81 NA 84 74 Iskenderun Iraq Syria Mediterranean Sea 35° Lebanon Given the level of TCDD costs and tariffs, it is not likely that any TCDD lines currently carry profitable traffic. On average, in 2001, TCDD earned revenue of $6.70 and incurred direct expenses of $26.80 for each ton of freight transported. Passenger loses are even greater in proportion. In 2001, these subsidies represented about 20% of customer revenues and 11% of total revenue including all other forms of subsidy. In that year, all income, including all forms of subsidy, represented only about 50% of expenditures. TCDD also receives subsidies for track maintenance and repair, for the operation of uneconomic express trains and the Lake Van Page 27 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies ferry. Railway expenses represent about 250% of railway revenue and subsidy payments. An analysis of all TCDD lines will reveal that nearly all of them lose money. No information system, cost reduction program, no efficiency improvement can make TCDD profitable without significantly reducing the size of the network. Reductions in network size can significantly reduce loses and government support requirements. TCDD Passenger Network with >1-million PKms/year 30° 35° 40° Russia Bulgaria Black Sea Georgia Zongul dak 15 Istanbul 22 14 12 Hydarpasa 23 Samsun Greece 13 59 11 01 02 03 21 55 58 Armenia Turkey 54 04 57 Kars Bandi rma Ankara 40° 05 16 40 08 07 06 19 17 18 20 Ki rikkal e 52 Si vas 51 56 24 53 60 39 10 09 87 38 Kutahya 89 88 62 Mani sa 86 Afyon Iran 26 61 28 41 63 68 37 36 70 29 43 Kayseri Mal atya 30 Izmi r 64 67 37 71 25 69 50 90 42 44 Konya Narh 80 65 66 49 35 45 46 72 79 48 73 78 Ul uki sl a Adana 82 83 85 Mersi n 75 74 76 77 81 NA 84 Iskenderun Iraq Syria Mediterranean Sea 35° Lebanon To determine the potential scope of a network reduction program, TCDD’s network was analyzed on a link or segment basis for both passenger and freight traffic. For passenger traffic, a network of lines carrying a minimum of 1 million passengers per year was constructed.31 The network includes all major cities with commuter service and intercity services from Istanbul to Ankara and Afyon. That network, shown above, captures about 60% of all passenger traffic and includes about 13% of the network. This passenger network neatly divides into suburban networks that need not be connected, and Turkey’s most important intercity lines. TCDD Freight Network with >1-million Tons 30° 35° 40° Russia Bulgaria Black Sea Georgia Zongul dak 15 Istanbul 22 14 12 Hydarpasa 23 Samsun Greece 13 59 11 01 02 03 21 55 58 Armenia Turkey 54 04 57 Kars Bandi rma Ankara 40° 05 16 40 08 07 06 19 17 18 20 Ki rikkal e 52 51 Si vas 56 24 53 60 39 10 09 87 38 Kutahya 89 88 62 Mani sa 86 Afyon Iran 26 61 28 41 63 68 37 36 70 29 43 Kayseri Mal atya 30 31 Izmi r 67 64 37 71 25 69 50 90 42 44 Konya Narh 80 65 66 49 35 45 46 72 79 48 73 78 Ul uki sl a Adana 82 83 85 Mersi n 74 75 76 77 81 NA 84 Iskenderun Iraq Syria Mediterranean Sea 35° Lebanon A similar analysis identified the segments of the network that carry at least 1-million tons.32 To this network were added links to ports and lines connecting network segments. The 1-million-ton network is shown in red 31 This represents about 3,000 passengers per day, a level that, while not likely profitable, should be economically justified. 32 At this threshold, freight traffic can be profitable. Page 28 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies and the necessary connecting lines in purple. This network captures 85% of TCDD freight traffic and requires about 50% of the network kilometers. Connecting lines to Greece and Bulgaria are assumed to be subsidized. TCDD Network with 1-m Pkm & 1-m Tons & Connections 30° 35° 40° Russia Bulgaria Black Sea Georgia Zongul dak 15 Istanbul 22 14 12 Hydarpasa 23 Samsun Greece 13 59 11 01 02 03 21 55 58 Armenia Turkey 54 04 57 Kars Bandi rma Ankara 40° 05 16 40 08 07 06 19 17 18 20 Ki rikkal e 52 Si vas 51 56 24 53 60 39 10 09 87 38 Kutahya 89 88 62 Mani sa 86 Afyon Iran 26 61 28 41 63 68 37 36 70 29 43 Kayseri Mal atya 30 31 Izmi r 67 64 37 71 25 69 50 90 42 44 Konya Narh 80 65 66 49 35 45 46 72 79 48 73 78 Ul uki sl a Adana 82 83 85 Mersi n 75 76 77 81 NA 84 74 Iskenderun Iraq Syria Mediterranean Sea 35° Lebanon The combined networks involve about 53% of the existing railway network. If it is assumed that passenger services are the same as in the passenger-only network discussed above (i.e., passenger services provided on 13% of the network), the railway captures 75% of total current traffic units (85% freight; 60% passenger). Traffic density on the resulting network is about 2.7 million traffic-units per-kilometer. To test the upper bound on network and operations size, an 80%-of-traffic network was constructed. A network that captures 80% of the passenger business requires only about 35% of the railway network. Similarly, a network that captures 80% of the freight business requires about 48% of the rail network. TCDD Network Capturing 90% of 2001 Traffic Units 30° 35° 40° Russia Bulgari Black a Georgi Zonguldak Sea a 15 Istanbul 22 14 12 Hydarpasa 23 Samsun Greec 13 01 59 02 03 55 58 Armenia e 11 21 Turkey 54 04 57 Kars Bandirma 05 Ankara 16 40° 40 19 17 18 20 Kirikkale Sivas 08 07 51 56 06 52 24 53 60 39 10 09 87 38 Kutahya 89 88 62 Manisa 86 Afyon 26 61 29 28 41 37 36 43 Kayseri 63 68 70 Iran 30 Izmir Malatya 67 31 64 37 71 25 69 50 90 42 44 Konya Narh 80 65 66 49 35 45 46 72 79 48 73 78 Ulukisla Adana 82 83 85 Mersin 75 76 77 81 NA 84 74 Iskenderun Iraq Syria Mediterranean 35° Sea Lebano n Combining these two networks and adding connecting segments and connections to the European railway networks yields a network that captures 90% of existing traffic33 and requires about 60% of the existing network. This network is shown in red on the map above. 33 This assumes that all passenger services continue on the combined network. Page 29 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Railway Law and TCDD Reform Strategies This reduced network has a density of about 2.9 million traffic-units-per-kilometer.34 It is not clear that this entire network is commercially viable (especially if all passenger services currently operating on this network continue). However, it is reasonable to assume that an economically viable network lies between the 90% network and the combined 1-million-traffic-units network. Either represents a significant reduction in network size and can reduce necessary subsidies significantly. Reductions in the size of the network also reduce the fleet, stations, facilities, and staff required to service it. When coupled with improvements in operating efficiency, increased outsourcing, and concessioning, the overall cost of the railway to government can be reduced substantially. The Government may wish to maintain other railway lines to preserve international rail connections35 but the cost of these lines and any operations on this extended network may require additional subsidy. A more complete analysis of railway traffic may show that some portion of the railway network is commercially viable. A somewhat larger network may be economically viable (this would include the commercial network as well as suburban and commuter lines). The size of the economically viable network would be determined by how much costs can be reduced and tariffs increased. The method currently used by the Government to determine and pay subsidies gives TCDD an incentive to keep as large a network as possible. 34 Traffic units are higher for this network because passenger services are assumed to be kept on all lines in the network whereas in the reduced network case, passenger services are only maintained on the core passenger network. 35 For example, the route through Van to Iran and the route through Kars to Armenia Page 30 V ALTERNATIVE RESTRUCTURING STRATEGIES G overnment has a wide range of alternatives to consider for restructuring TCDD. One issue that an analysis of restructuring options should address is whether any part of the network can be operated commercially and, if so, under what conditions. Another issue that must be addressed is the economic value created by the rail services. Should the economic value of railway services be high, it may be worthwhile to subsidize greater portions of a non-commercial network. If, on the other hand, the railway does not create economic value, then the percentage of the non-commercial network that should be maintained will depend on non-economic issues. For example, many governments believe there is a national defense value to the rail network, or that connections with railways in neighboring countries have significant diplomatic value. This is likely to be the case for Turkey’s entry to the EU. Connections to Bulgaria, Greece, and Iran, may be diplomatically and strategically important. A minimum restructuring effort would stop with the current changes taking place—elimination of the regional headquarters and some organizational changes within TCDD. A second alternative is defined by TCDD’s restructuring strategy, supported by the draft law on railway management. A third alternative would more radically restructure the railway network for both freight and passenger services. These alternatives form the boundaries of feasible restructuring alternatives available to the government, short of concessioning, or privatization, of commercially viable railway services. To evaluate these alternatives, a simple financial model was used to evaluate employment and railway cost changes. Since the overall structure of TCDD is not addressed in the railway law, the analysis is conducted on railway activities only. All cases use the same underlying traffic growth assumptions: Traffic rebounds from the current recession in 2003, freight traffic grows at 8% and mainline passenger traffic at 5%. In 2004, an economic rebound continues, freight traffic increases by 5% and underlying passenger traffic growth is 5%, responding to improvements in the Ankara-Istanbul line. After 2004, freight traffic demand resumes its 2% to 3% growth rate while main line passenger traffic demand grows at its historical rate of about 1%. In all cases, suburban traffic is assumed to continue its decline of about 1% per year as it has in the past few years. To simplify analysis, no price changes are assumed and the financial analysis is conducted in constant 2002 US dollars. In cases with reduced networks, traffic is eliminated on the lines or services reduced; no significant shifts in traffic patterns are assumed. 5.1 MINIMUM RESTRUCTURING: BASE CASE The railway is currently adjusting its organization structure to eliminate regional offices and to form new business units for passenger and freight services as well as a new infrastructure unit. While these changes may tend to focus more attention on the business aspects of freight and passenger services, no part of the plans currently being implemented suggest substantial reductions in network size or in the number of services Page 31 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Alternative Restructuring Strategies offered. The Infrastructure department is giving a great deal of attention to expanding the capability of the existing network by double-tracking, electrifying, and streamlining36 significant portions of the network. While TCDD’s research and planning group has prepared a plan for substantial employee reductions, most senior officers are more concerned about a lack of skilled staff for certain critical services. Railway management appears to be concentrating on positioning itself to hire additional staff to satisfy these shortages. Plans are being developed to add high-speed train services, expand suburban services by investing in a line running under the Bosporus, connecting European and Asian sides of the railway. There are indications that TCDD could achieve its objective for reducing staff by 25% (about 10,000 staff) by moving affiliated companies outside of TCDD (about 5,800 employees), moving responsibility for security to another government agency (about 2,200 employees), moving health organizations to another government agency (about 900 employees), eliminating regional headquarters organizations (estimated at about 50 staff), and separating manufacturing facilities now within the permanent way department by a partial sale (affecting another 500 employees). The services of these units would simply be bought-in or provided by other agencies without charge to TCDD (e.g., security). Unless such services are subject to competitive tendering or other efforts at increasing efficiency, there is no indication that such actions would substantially reduce the overall cost to government. The draft railway law provides for TCDD to determine the size and scope of its services, to prepare budgets and staffing plans, and a capital program. Once these are approved by the board of directors, the state is obligated to fund them. It is reasonable to assume that TCDD would not suggest a substantial reduction in its size and the scope of its services; it is highly unlikely that it will suggest reduced investment. Under the minimum restructuring plan, the cost of TCDD is likely to continue to climb rapidly. While the improved network that would result from investment is likely to increase traffic somewhat, it is unlikely to improve profitability. That is, costs, now about three times revenue, would continue to climb faster than revenue. Given TCDD’s ver y low freight rates, it is unlikely that service improvements would attract significant new freight traffic. Under the minimum restructuring scenario, the cost of TCDD to government could increase rapidly. Actual costs would depend upon the ability of the Government to fund planned investment programs. The substantial increases in investment sought by TCDD would be funded with sovereign loans from development banks. For the financial analysis in this section, it is assumed that there are no substantial loans for new lines and major enhancements. The cost to government still increases substantially over the period. Under this scenario, direct railway employment (about 30,000 in 2002) grows slowly with traffic increases (to about 38,000 in 2011). The cost to provide railway services, net of railway revenue, grows from approximately $900-million in 2002 to about $1,100-million in 2011. Cumulative cost of support over the period is about $10.1 billion over the 10-year period. 5.2 TCDD STRATEGY CASE The TCDD Strategy case assumes additional cost reduction efforts, primarily by mechanization and outsourcing of some permanent way activities. The strategy also calls for changes in freight services, elimination of some passenger services, and separation of affiliated companies and some internal manufacturing capabilities. Investments in mechanization of permanent way activities and increased outsourcing of those activities are assumed to reduce the cost of permanent way maintenance by about 15% over a three-year period. It is assumed that the effort to reduce uneconomical passenger services reduces the number of passenger trains run by about 30 percent (10% per year for three years, starting in 2003). The effect of elimination of regional offices is enhanced by further internal organizational changes, reducing the cost of central services by about 10% over a two-year period. The network is assumed to remain about the same size (with the exception of the addition of some double track where the work is currently underway). 36 Streamlining is a process of improving track geometry to increase train speeds. Page 32 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Alternative Restructuring Strategies As with the previous case, TCDD could pursue a course of moving some functions to other government agencies. These changes would not necessarily result in reductions in the cost to government unless competitively tendered or subject to other, now outside, efforts at efficiency improvement. In this scenario, it is also assumed that there is no substantial investment in new lines, electrification, or substantial double tracking. Under this scenario, direct railway employment (about 30,000 in 2002) remains relatively constant, increasing with traffic to about 34,000 by 2011. The cost to provide railway services, net of railway revenue, grows slowly from approximately $900-million in 2002 to about $990-million in 2011. Cumulative cost of government support is about $9.4 billion over the 10-year period. 5.3 90% TRAFFIC NETWORK STRATEGY This scenario builds on the TCDD strategy. In addition to the assumptions in that case, it is assumed that lightly used lines are closed and the traffic on them eliminated. The network for this case was constructed by combining the passenger network that services 80% of all passenger traffic (including both suburban and main-line passenger services) with a freight network that services 80% of all freight traffic. Traffic on lines that were not common between the two networks is retained. Connecting links and links to European borders are retained. The combined network includes about 60% of current TCDD lines and captures 90% of existing freight and passenger traffic. This network is shown in the map below (and is discussed further on page 24). TCDD Network Capturing 90% of Traffic Units 30° 35° 40° Russia Bulgaria BlackSea Georgia Zonguldak 15 Istanbul 22 14 12 Hydarpasa 23 Samsun Greece 13 59 11 01 02 03 21 55 58 Armenia Turkey 54 04 57 Kars Bandirma Ankara 40° 05 16 40 08 07 06 19 17 18 20 Kirikkale 52 5S 1ivas 56 24 53 60 39 10 09 87 38 Kutahya 89 88 62 Manisa 86 Afyon Iran 26 61 28 4 63 68 1 70 37 36 29 43 Kayseri Malatya 30 31 Izmir 64 67 37 71 25 69 50 90 42 44 Konya Narh 80 65 66 49 35 45 46 72 79 48 73 78 Ulukisla A dana 82 83 85 Me rsin 7 7 5 4 76 77 81 NA 84 Iskenderun Iraq Syria MediterraneanSea 35° Lebanon It is assumed that abandoned lines are simply abandoned; TCDD does not receive any benefit from the sale of materials. While a more complete analysis may consider the possibility of private operators continuing service on these lines, no traffic is assumed to come from them. The abandonment of the Lake Van ferry service (in the ports department) is not considered in railway costs. This scenario also assumes that there is no substantial investment in new lines, electrification, or substantial double tracking. In this scenario, direct railway employment (about 30,000 in 2002) declines to about 23,000 by 2005 as the lines and services are abandoned, and then increases again with traffic growth on the core network. Rail related employment by 2011 is estimated to be about 27,000 staff. The cost to provide railway services, net of railway revenue, drops by about $200 million a year as lines and services are abandoned and then grows slowly from approximately $900-million in 2002 to about $800-million in 2011. Cumulative cost of government support is about $8-billion over the 10-year period. Page 33 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Alternative Restructuring Strategies 5.4 CORE NETWORK SCENARIO In this scenario, a more radical reduction in network size is assumed. A core freight network composed only of lines with 1-million tons per year is supplemented by a passenger network that retains all suburban and commuter services and the key intercity trains between Istanbul, Ankara and Afyon.37 TCDD Core Network 30° 35° 40° Russia Bulgaria Black Sea Georgia Zonguldak 15 Istanbul 22 14 12 Hydarpasa 23 Samsun Greece 13 59 11 01 02 03 21 55 58 Armenia Turkey 54 04 57 Kars Bandirma Ankara 40° 05 16 40 08 07 06 19 17 18 20 Kirikkale 52 Sivas 51 56 24 53 60 39 10 09 38 Kutahya 87 89 88 62 Manisa 86 Afyon Iran 26 61 28 41 63 68 37 36 70 29 43 Kayseri Malatya 30 31 Izmir 64 67 37 71 25 69 50 90 42 44 Konya Narh 80 65 66 49 35 45 46 72 79 48 73 78 Ulukisla Adana 82 83 85 Mersin 75 76 77 81 NA 84 74 Iskenderun Iraq Syria Mediterranean Sea 35° Lebanon An important factor about this network and strategy is that passenger services beyond the core passenger network are not assumed, even over the larger core freight network. Note that this network includes international connections to Greece, Bulgaria, and Iran. Services on some of these connections (Greece and Iran, in particular) may have to be subsidized. This network involves about 53% of existing trackage and captures 60% of current passenger traffic and 85% of freight traffic. As in the prior case, lines abandoned do not generate any cash contribution to the remaining railway, they are simply abandoned. This scenario also assumes that there is no substantial investment in new lines, electrification, or substantial double tracking. In the reduced network scenario, direct railway employment (about 30,000 in 2002) declines to about 18,000 by 2004, as lines and services are abandoned, and then increases again, to about 21,600 by 2011, with traffic growth on the core network. The cost to provide railway services, net of railway revenue, drops by about $300 million a year as lines and services are abandoned and then grows slowly from approximately $900-million in 2002 to about $625-million in 2004. From this level, cost net of revenue climbs to about $700-million by 2011. Cumulative cost of government support is about $7-billion over the 10-year period. 5.5 EFFICIENCY IMPROVEMENTS To address the question of cost effectiveness, this scenario builds upon the reduced or core network scenario38 considers various improvements to the efficiency of railway operations. Here, the basic assumptions are that railway operations and management become more efficient. Using benchmarking, improved management practices, information systems, and an improved operating plan concentrating on unit or blocked trains for freight traffic and a few specific intercity passenger routes. In this scenario, operating costs are assumed to be reduced by an average of 20%. Fuel efficiency improves by about 10%. In this scenario, the cost to provide railway services, net of railway revenue, drops by an additional $100-million, to about $600-million in 2011. 37The network and operations assumed in this reduced network strategy are described further on page 24. 38This scenario already includes some assumptions about efficiency improvements from the TCDD scenario. These primarily affect permanent way maintenance and freight operations. Page 34  TURKISH STATE RAILWAY: OPTIONS FOR REFORM Alternative Restructuring Strategies Cumulative cost of government support is about $6-billion over the 10-year period. Since operating costs are much greater than revenue, the cost reduction program, though significant, does not substantially reduce the total amount of government support required. Price increases for freight traffic may also be considered. However, freight revenue is only about $100-million per year so even doubling freight prices reduces subsidy requirements by an additional $100-million per year or cumulatively to about $5-billion over the period. 5.6 PRIVATIZATION AND CONCESSIONING More substantial reductions in the cost of railway services to government can be achieved by privatization of railway freight operations (including concessioning the infrastructure), and separate concessioning of suburban and intercity passenger services separately. This maximum private sector option is estimated to cost government about $160-million per year for passenger services (both suburban and intercity), and payment for maintaining services and infrastructure on internationally strategic lines. Over the 10 year period, the total cost to government is about $3-billion, not including any revenue received from the privatization or taxes paid by the commercial, private sector rail freight operator. 5.7 SUMMARY AND CONCLUSIONS These alternatives provide a range of options for restructuring TCDD’s railway activities. It is important to note that even major changes to the rail network and rail services do not make TCDD’s rail business a cash generator. There are significant Rail Cash Flow differences in the amount of cash $0 Concessioning consumed by a state owned railway, Reduced Efficient Network depending upon the size of the -$200 Reduced Network network operated. However, even with 90% Traffic TCDD Reforms substantial reductions in network size, -$400 Base Case significant efficiencies, and a doubling $ Millions (2002) of freight tariffs, cash requirements remain significant—between $5 and -$600 $10-billion over the next 10 years. -$800 Reductions in network size reduce railway employment about half 45,000 -$1,000 Railway (Only) Employment between high and low alternatives. 40,000 The continuing high cash costs, even -$1,200 after substantial network reductions, 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 35,000 efficiencies, and significant freight 30,000 price increases reflect the light density and high-cost nature of TCDD’s rail system. Reducing cash requirements Staff 25,000 substantially requires more radical 20,000 reform measures—including making the network more efficient, increasing 15,000 Base Case density, and reducing capital 10,000 TCDD Reforms requirements at the same time. 90% Traffic Reduced Network 5,000 Reduced Efficient Network Concessioning and privatization Concessioning should not be dismissed as an 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 impossible option but, rather, should be considered more fully. The government of Turkey may not be able to afford the substantial cost of subsidizing services that can be provided on a commercial basis. The core freight network has at least 1-million tons on all retained lines. At Page 35 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Alternative Restructuring Strategies this level, commercial operation of the network is feasible. Private freight operators are known to operate rail services very efficiently. The literature on railway privatization and concessioning describes many successful suburban and passenger-service concessioning efforts. Concessionaires typically have been able to reduce costs by at least 25%; private operators have had even greater success reducing cash requirements (using assets very efficiently), and providing superior customer service. The reduced network alternative discussed provides a basis for privatization and concessioning of both freight and passenger services. In this case, the Government would privatize (or concession) the core freight network entirely and eliminate the need for government subsidies for this network.39 Suburban services would also be concessioned with the expectation of reducing operating costs and subsidy requirements by 25%. A long-term concession is potentially even more attractive. TCDD’s suburban service EMUs are aging and will require replacement in the near future. A long-term concession can be designed to include new equipment, maintenance facilities, and system upgrading. The net result would be a substantial reduction in government cash requirements for rail services. 39 Subsidies may still be required to operate and maintain services on strategically important border connections. Such services would be subject to competitive bidding (there are a number of private railway operators active in Europe so significant competition is likely) and are likely to cost substantially less than current costs. Page 36 VI RECOMMENDED NEXT STEPS T CDD’s proposed reform and restructuring efforts do not go far enough. Turkey can have better rail services at much lower costs than possible with the current structure of rail services. It is very likely that many existing rail services do not create economic value and should be discontinued in any event. That likelihood is the basis of restructuring alternatives that consider reducing the lightest density lines. It is also very likely that some TCDD freight services can be provided commercially. The density of the core freight system (about 50% of the existing network) is high enough to attract competitive bids should they be privatized or concessioned, especially if other railway lines and services would be also be put out for bids (e.g., intercity passenger services, border freight services, suburban services). Before it proceeds with a new law and the currently proposed restructure strategy, the Government of Turkey should consider a much wider range of reforms, including privatization of the core freight system and concessioning of important passenger services. The cost of providing railway services would be substantially lower and the need for the government to finance infrastructure and equipment would be substantially reduced. Over the next 10 years, savings could approach $7 billion. While it may not wish to pursue privatization at the present time, the government of Turkey should preserve the option to do so in the future. Should it wish to pursue these options, the state will require a different kind of agency than that provided in the draft law. Analysis of the alternatives and establishment of an alternative agency is needed. Whether or not the government pursues a privatization or concessioning strategy, the current strategy can be greatly improved with further and more detailed analysis. The necessity of reducing uneconomical services and lines is recognized even in TCDD’s strategy document and some reductions are planned. TCDD’s plans should be more, rather than less aggressive. Such network and service reductions will provide a substantial pool of employees for positions in short supply. An analysis clearly showing the tradeoffs between service reductions and shortages of staff positions and other resources should be conducted before hiring new staff and before purchasing new rolling stock. The government and railway are considering a number of investments in high-speed passenger services, line capacity improvements, locomotives, and rolling stock. These investments and alternatives should be carefully analyzed and alternatives considered in light of a restructuring strategy that is pursued. New tools are needed for such analyses. Recommended next steps for TCDD and the Government are: • Conduct a more detailed and integrated Strategy Analysis using a financial model based on IAS.40 This strategy analysis should fully review alternative structures, including privatization and concessioning arrangements. This analysis should lead to the development of an Integrated Restructuring Plan for Government and TCDD. This analysis should address issues such as: If services are to be outsourced, who will do it; Who defines the services to be tendered; how are service providers regulated; who regulates safety; etc. • Develop revisions to the Draft Railway Law reflecting the integrated restructuring strategy developed in the Strategy Analysis. The draft law would establish the commercial enterprises recommended in the Strategy Analysis, and define the regulatory and government organizations needed to provide oversight of government spending, develop and manage the government’s transport strategy, and regulate commercial transport modes. This law would also reflect the requirements of EU membership. 40 IAS: International Accounting Standards Page 37 TURKISH STATE RAILWAY: OPTIONS FOR REFORM Alternative Restructuring Strategies • Develop a network transition strategy to achieve government objectives. A network operations planning and line capacity model should be used for these analyses. These analyses should be integrated with a financial planning model so that operating plans, budgets, staffing, and physical resources can be identified and justified. • Prior to making any additional significant investments in new railway line capacity (including construction of additional tracks, improved signaling, extended electrification, and streamlining), a line capacity alternatives analysis should be conducted. The most cost effective operating methods, and investments for increasing capacity should be evaluated thoroughly and any new investment justified on a financial return basis. This will require a line capacity model and improved financial analysis tools and skills. Page 38