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CD in search of commercial freedom

01 Jul 1999

INTRO: General Manager Dalibor Zeleny is convinced that he could turn Czech Railways into a viable business. But this will only happen if CD is given political freedom as a joint stock company. Murray Hughes reports from Praha

BYLINE: Dalibor Zeleny

General Manager Czech Railways

GIVEN THE cries of doom that can be found in Eastern Europe's business media about the future of Czech Railways, General Manager Dalibor Zeleny is remarkably optimistic. In the organisation's imposing headquarters fronting the Vltava river, Zeleny readily admits that 'CD has cash-flow problems, which are causing us difficulties with our suppliers'. These include companies such as Ceska Trebova-based maintenance contractor Zeleznicni Opravny a Strojirny, whose Director Petr Kasik lamented in May that 'CD owed us, owes us and will owe us'. In recent months the railway has kept solvent by using short-term bridging loans, but a loan tender earlier this year found no takers among the increasingly wary banks.

This helps to explain why Zeleny is keenly looking forward to changes planned by the government 'to provide additional finance for passenger services', the cost of which is perhaps the biggest obstacle in his plans to turn CD into a viable business.

Zeleny's positive view stems largely from the success of CD's freight traffic, with a market share measured in tonne-km of 40 to 45%. While freight turned in a profit of KC1·8bn last year, the passenger sector, in marked contrast, lost KC11bn. CD's network includes many regional and rural lines where the railway is still a lifeline for local communities, and attempts at closure have resulted in widespread and vociferous protests.

Regional lines debate

No railway topic in the Czech Republic is guaranteed to generate such heated debate as the future of these routes. A few have been placed in the hands of private operators, but Zeleny says 'they have the same funding problems - and we are in the same mess.' But he does concede that 'smaller companies are nearer to the customer and can be more effective.' Against this he sets CD's greater efficiency in terms of economies of scale: 'we do not need so much rolling stock, for example.'

But Zeleny emphasises that 'CD is not going to initiate any more line closures.' He refers to two lines, one of which attracted a private operator who then withdrew, adding that 'we do not want to do it any more as we have proved it does not resolve anything.' But he felt that if the funding question can be resolved, 'we will look for closer co-operation with regional operators.' He also says that 'some progress has been made with reducing the operating costs of rural lines.'

CD's subsidy last year was KC5·7bn, which with the KC1·8bn profit from freight left a deficit of KC3·5bn. Not since 1992 has the state covered the full loss on passenger services, with the result that CD's accumulated losses now amount to KC29bn, causing 'significant difficulties'.

The government insists that fares remain fully regulated, and Zeleny says that if CD charged the full cost to passengers, the services would be inaccessible to many people. He adds that 'this is not the only problem - the conditions of competition with road traffic need to be brought into line so that road vehicles pay for the cost of the infrastructure they use - at the moment buses pay no road tax.'

CD's long-distance passenger services fare better and at least cover their operating costs. CD has been part of the EuroCity network for six years, 'and I think that we are among the most civilised railways in terms of customer service.' Like ÖBB, 'we have introduced a number of SuperCity trains, for example between Praha and Ostrava, that have been very successful, with a load factor approaching 90%. It is used by managers and MPs.' CD's share of the Czech market for passenger travel is about 20%.

Joint stock company

Before Zeleny and his management team can make progress in turning the railway round, they need a measure of independence. 'The first step is to move to the structure of a shareholding company, in which the government owns all the shares. This would allow us to develop our business activities, and freight in particular.'

Proposals for conversion to a joint stock company will need parliamentary approval, and a law is being drafted by the Ministry of Transport. Zeleny says that three basic questions must first be resolved: the means to manage down the accumulated debts, harmonisation of the conditions of competition, and funding arrangements for public service passenger operations 'that do not result in yet more debts'.

If CD is to be managed as a business, Zeleny says it will have 'to concentrate on those activities it does best', but it will separate out 'functions which could be more profitable in a CD subsidiary'. He cites CD's travel agency and a freight forwarding company as prospective candidates. The subsidiaries would be open for private sector companies to take shares. But CD 'cannot rely on the government accepting the plans to set up subsidiaries' and is already drawing up proposals to attract investors to share in specific projects.

These proposals have already been endorsed by CD's management board, and Zeleny says the first priority will be to set up a joint venture with private investors 'to resolve the problems of our freight wagon fleet'. The difficulty, he says, is that many vehicles do not meet international standards and need to be rebuilt. He envisages that the rebuilt wagons would be owned by the joint venture and leased back to CD, which would retain a 60% stake.

Competition

Pressed on the question of private sector involvement in operations, Zeleny claims that the Czech Republic has the only railway in Europe with practically no access regulations. This led in 1998 to private sector freight operators securing 11% of rail freight tonnage.

These operators are partly former CD customers who have decided to venture into rail transport or 'transport entrepreneurs', and Zeleny says the law requires them only to demonstrate that they are 'proficient operators'. It does not, he says, require them to be financially viable - presumably CD could not operate either if it did - nor to be insured.

Suggesting that rail freight operations are 'very profitable' for these competitors, he is very proud that CD has succeeded in winning back 'a quite significant proportion'. It has done this 'by establishing the highest level contacts with our customers, and very recently we have concluded a number of long-term contracts that offer a guaranteed price and just-in-time deliveries.'

Citing the success of one coal contract, Zeleny said that the deal 'has allowed our customer to reduce coal stocks at the power station - we found out what customers wanted, and we were very flexible. We still had a lot to do, but we are convinced it's the only right way.'

Transit freight generates a large slice of revenue, and CD is a partner to the agreement with Austrian Federal Railways and Polish State Railways that seeks to compete for north-south traffic with the embryonic DB Cargo-NS Cargo alliance. Signed up in March, the agreement was put together 'in only four months', but Zeleny is coy about the details, saying 'we don't like to speak about it'.

Zeleny believes that CD offers 'a stabilising element in an entrepreneurial environment', and he considers that 'if we can resolve the funding of passenger services, we can become one of the elements that will start economic growth without state investment.'

'We have many investment projects for the future, for example new double-deck trains, construction of a rail-air link to Praha airport, and reconstruction of the Hlavni (Central) and Mararykovo stations in Praha.' The airport link is a simpler version of an earlier scheme which had failed to attract enough investors because of its high cost. A feasibility study for the revised project, which uses some existing route and is partly single track, suggests that it is more cost-effective. Zeleny sees it as a potential project for a public-private-partnership.

But the bulk of investment funding will be channelled into the important transit corridors. The next five years will see KC27bn spent on upgrading and improvement works; 30% of this will be state funding, 50% will be credits guaranteed by the state, and the rest credits without state guarantees.

Imagination

CD has carried out a 'future vision' study which has been 'highly appreciated' by the management board, especially as it was produced without high cost consultants. 'Our latest results prove that real imagination works', says Zeleny, who suggests that CD's aim should be to retain its market share - the target is to keep annual tonnage at about 90 million, with an average 180 km haul keeping annual tonne-km close to 20 billion. The passenger target is to carry 200 million passengers a year, representing 8 billion passenger-km.

Hankering, like his west European counterparts, after harmonisation of the conditions of competition with road trafic, Zeleny is confident that 'our results will be even better', but he knows that 'we must acknowledge one basic fact - coal traffic, our major commodity, will fall significantly.' Yet, he insists, 'this is built into our business plan, and we shall be able to replace it with transit business.'

Zeleny's greatest wish is 'to make CD more dynamic and turn it into a real business. We have done enough to prove it can be done, with staff numbers cut from 162000 in 1989 to 90000 this year.' Productivity is growing, and measured in terms of revenue per employee, after allowing for inflation, it rose by 80% between 1993 and 1998. The next few years will see further reductions in staff, but they will be less dramatic.

Zeleny is confident that 'we have a big advantage over our competitors - we have a big share of the market and quite good employees; to them, their job is more than simply earning a wage.'

CAPTION: Top: Decin - Praha - Breclav inter-city services will be speeded up substantially from the May 2000 timetable change following the completion of electrification work on the Brno - Svitavy - Ceska Trebova direct line earlier this year (RG 3.99 p130)

CAPTION: CD has been part of the EuroCity network for six years, and is currently taking delivery of 26 Type Bmz second-class coaches for 200 km/h EC and IC services on Corridor 1. Costing KC950m, they were ordered from MSV Studénka and Siemens SGP in 1995 with nine Ampz first-class cars (right)

CAPTION: Czech Railways unveiled the first completed Class 471 three-car double-deck EMU in Praha on May 7. Four 2-car and six 3-car sets were ordered from Vagónka Studénka in 1995 but only one of each type has so far been delivered. The 3 kV DC sets have bodyshells welded from aluminium extrusions to an Alusuisse design and are powered by Skoda 500 kW asynchronous motors giving a top speed of 140 km/h. Air-conditioning was supplied by Hagenuk-Faiveley of Germany. A 25 kV AC version designated Class 571 is planned, and a dual-system option is also under consideration

CAPTION: Loss-making rural and regional lines in the Czech Republic remain a headache for CD. Only if the government agrees to better funding will the issue be resolved

Transit freight holds the key to a commercial turnround

Czech Railways General Manager Dalibor Zeleny is preparing the 9341 km network for changes that include turning it into a joint stock company. Profitable freight traffic is of major importance as CD strives to balance the books, and available investment is being channelled into transit corridors to generate maximum revenue. With government help, the loss-making passenger business must be put on a more secure footing to avoid CD accumulating more debts; only then will Zeleny be able to complete the transition to a business-led railway

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