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PKP poised to take the privatisation plunge

01 Jul 1999

INTRO: Jan Janik, President of the Management Board and Director General of Polish State Railways, discussed with Murray Hughes in Warszawa how he is preparing the network for a rapid process of transition, first to a restructured business-led railway and then truly into the private sector

BYLINE: Jan Janik

President & Director General Polish State Railways

PRESIDENT of the Management Board of Polish State Railways Jan Janik recalls how he remarked on Railwayman's day last year that Poland could live without PKP, but not without a railway. Little did he realise how prophetic the comment was. Interviewed in Warzsawa a few weeks ago, he confessed that he was 'a little bit surprised' that the end of PKP seems to be so close - 'but life brings unexpected things every day'.

Indeed it does. While privatisation of PKP has been a topic of discussion among board members for nearly three years, the government's and parliament's attention had until recently been turned elsewhere. Now the state is intent on rapid privatisation of the 22655 route-km network.

Janik stressed that PKP is well prepared - it has been busy gathering information from railways in western Europe and has conducted seminars with experts from Dutch, German, French and Swedish railways 'who were very helpful to us'. Now PKP is aiming to 'transpose proven solutions' to formulate its own strategy.

Janik said that 'we are now at the point where going further requires amendments in the law affecting rail transport'. Intensive work is in hand at the Ministry of Transport & Maritime Economy, and within the forum of government. Precisely what form the final model will take will be decided by parliament - Janik remarked that 'we as experts can merely advise and point to the consequences of different solutions', adding that privatisation of the largest company in Poland was bound to be postponed while the country made the transition from socialism to a market economy.

The government has recently been wrestling with restructuring of state administration, social insurance, and healthcare, as well as agriculture and the mining and steel industries. Implementing change on such a scale is bound to require major outlay, and it was not possible to privatise PKP at the same time.

Given what was happening on other railways, Janik felt that it was essential to begin preparing PKP for change without counting on any help from the state budget. Comparing the state of PKP with three years ago, he is pleased with his achievements.

From a highly centralised railway based on a territorial structure with eight regional managements, PKP was transformed in July 1998 into three directorates or sectors able to operate independently: Passenger Service, Freight Service and Railway Infrastructure. These joined the Directorate of Traction & Workshop Support, set up in 1997. The structure is consistent with the requirements of European Directive 91/440.

The Passenger Directorate has 24 operating establishments, and a separate one for the Warszawa commuter network. In the Freight Directorate are 39 operating establishments, while in the Infrastructure Directorate eight regional directorates oversee 45 infrastructure divisions. The principle is that each sector and department has its own budget.

Despite his pride in the changes made so far, Janik was all too conscious of the 'tremendous financial problems' facing PKP in the transition from the public sector, not least of which is the need to finance severance payments for employees who may not be taken on by PKP's successor companies. To appreciate what progress has already been achieved, 'one needs to know that until 10 years ago PKP had 436000 staff, whereas now it has 208000, and by 2003 there will be only 150000 - and that is not the final figure.' But Janik believes that employment of customer service staff will rise as future operators strive to upgrade the quality of their passenger services.

Perhaps most important in his view is that staff should switch their concern about technical performance 'that causes excessive costs' to an attitude where the aim is 'to find new customers - so that a dramatic mental transformation must follow.'

Janik hoped that 'the transition can be implemented quickly, especially as we have made changes to our internal finance methods to facilitate privatisation. We have established business sectors for the market segments, and we will have separated out all services not directly connected with operations by the end of this year.'

With 'government and parliament generating new laws for PKP to be privatised', the current objective is 'to transform the railway into a joint stock company with 100% of the shares owned by government from January 1 2000'. After that date it will be possible to set up quasi-independent companies running the passenger, freight and infrastructure businesses and to make other changes aimed at making the railway more market-orientated.

Janik conceded that this will be 'a very difficult task', but he insisted that 'we are prepared to go through with it.' He suggested that 'a Polish model' will be chosen, which 'in the transition phase will be similar to the restructuring in Germany'. Beyond he could see further changes that would take the network fully into the private sector. Here Janik linked the move to what has happened in Britain, which is 'the only real privatisation in Europe - all the others are artificial'. The watershed will be crossed as soon as the legal status has been agreed, but Janik warned that decisions needed to be taken about real estate and about involvement of the trade unions in the process of change.

Private sector interested

US freight operator Wisconsin Central has already eyed up the opportunities, and has put some proposals to government. Janik said he hoped 'many more parties will be interested - Wisconsin Central is just one of the first. We shall be assessing bids from a commercial point of view.'

The private sector is a potentially vital source of investment funds to Janik: 'neither PKP nor the government have enough money to allow modernisation of the network to make it competitive against road transport, or against other rail operators.' There are 'significant threats' to PKP's traffic, with the possibility of 'enterprise being squeezed out of the most attractive segments of the market'. This means that 'in time full liberalisation of access to the Polish transport market will be needed', although for the moment Janik has 'no intention to create companies to run trains in other countries.'

Janik is of the opinion that the freight business is a good candidate for attracting investors as it offers a rate of return of 20%. 'Poland is a huge transport market - but it needs huge investment to make it competitive both domestically and in Europe.'

In 1998 PKP carried 202·3 million tonnes, representing 60900 million tonne-km. This was 20 million tonnes and nearly 7 million tonne-km down on 1997, due mainly to a sharp fall in the traditionally heavy coal traffic.

Janik repeatedly emphasised that PKP will have to resolve its problems with little or no state support, as the government's concern 'is to repair the damage done to the economy from the socialist era'. He felt that 'the only chance for us is to seek external investment as much as possible through setting up joint stock companies.'

Perhaps the biggest challenge facing PKP is the funding of passenger services. While 'one may say that the EuroCity and InterCity services are profitable', with traffic up from 7·3 million journeys in 1996 to 9·5 million last year, PKP's other passenger trains are definitely not. They bring 'tremendous losses to the railway - over 2·5bn last year'. State support has steadily diminished since the Iron Curtain collapsed - in 1990 subsidy accounted for 17·6% of PKP's income, but it was only 6·7% last year.

This is why Janik saw an urgent need to 'create a system to cover passenger services subsidies'. As Poland moves towards entry into the EU, he considered that the government 'will be obliged to support passenger services', but he noted that it is not required to fund investment. Yet 'if we are expected to cope with competition, then we need to have trains like those we see featured in Railway Gazette International'.

These are likely to include a fleet of 16 tilting trains to be built by Fiat Ferroviaria, for which the funding arrangements are due to be agreed by September 30.

Asked about the scope for cutting the cost of running regional lines, Janik suggested that technology such as modern signalling could offer significant savings, but at the moment there was no money to pay for it.

Janik felt he was doing his best to create the right conditions for the future railway, whatever form that might take. 'In two years from now Poland will need a good railway - whatever it is called - and if we achieve that it will be my best personal success.'

Structure shaping up

By mid-June details were emerging of the likely structure of Poland's privatised railway. A draft bill was due to be agreed before the government recessed for the summer, with the Sejm (parliament) expected to pass it into law in the autumn.

The proposals would see PKP SA set up as a joint stock company tasked with managing infrastructure. Passenger and freight operating companies would be established with the government owning a majority stake in each.

Issues to be resolved include staff numbers and the future of 5000 km of rural lines. These could be funded by local government, paving the way for investment in low-cost rolling stock such as railbuses (above). Wisconsin Polska is reported to be interested in the freight business and in a minority stake in PKP SA.

CAPTION: Many EuroCity and domestic InterCity services have air-conditioned stock built by Cegielski and Pafawag

CAPTION: Freight traffic in Poland offers scope for private sector investment. US operator Wisconsin Central and the DB-NS Rail Cargo Europe venture are already seeking opportunities

PKP poised to take the privatisation plunge.

Polish State Railways (PKP) is about to enter a phase of major change. Last year PKP's centralised territorial structure was replaced by three directorates for the passenger, freight and infrastructure sectors, a move that paves the way for the establishment of separate businesses with financial autonomy. This in turn is designed to prepare the railway for a second stage of transition in which PKP will become a true private sector railway. PKP President Jan Janik discussed the transition with Murray Hughes in Warszawa. Meanwhile, 16 high speed tilting trains are about to be ordered, while new locomotives are under construction

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