Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

Railway Reform: Toolkit for Improving Rail Sector Performance
13. Encouraging Private Sector Participation
13.2 Typical Forms of Private Sector Participation
13.2.1 Contracting and outsourcing
Enterprise rationalization through increased contracting and outsourcing should
be part of any reform effort. All railways, even state-owned vertically integrated
railways, commonly contract with the private sector for a range of services from
purchasing supplies, such as fuel or materials, to contracting for services, such as
audit, accounting and even overhauling traction motors. Reforms that expand
contracting for services and materials can expand private sector participation and
stimulate increased private investment. What kind of reforms?
Many railway activities that were once considered ‘core’ can be outsourced to private
enterprises, depending upon the size of the economy. This includes simple
activities like building repair, cleaning, catering, repairs to bridges and structures,
workshop functions, and track renewals. Some railways have outsourced
on-board passenger services and ticket collection to control fraud, improve services,
and reduce the need for non-core investments.
Many railways have subsidiary entities that produce everything from ballast and
sleepers to advertising and printing. Many of these subsidiaries can be sold to
raise capital for fundamental investments. Typically, when the same services and
materials are purchased through competitive bidding, costs plummet. During
railway reform implementation, a crucial task is to identify core functions and
shed as many of the others as possible. This cuts costs and capital needs associated
with non-core functions, and expands private sector participation.
When railways expand the share of non-core functions that they now purchase
and outsource, they will need to strengthen procurement capacity, and upgrade
contracting and bidding practices through staff retraining programs. Some railways
balk at contracting out many functions, citing ‘safety issues’ as an impediment,
and claiming that any cost savings from contracting will be cancelled-out
by increased supervision costs. However, global evidence proves that it is safe
and cost-effective to contract many functions to private sector enterprises—from
signal maintenance to on-board catering—despite the need for increased supervision
of contractors.
Rationalization of subsidiary enterprises and increased contracting and
outsourcing should be part of any railway reform effort.
13.2.2 Service contracts
Many governments, frustrated with the cost and difficulty of reforming their
state-owned railway, seek to solve the problem by outsourcing railway management
to a private sector operator. This can be effective but is fraught with difficulty.
One of the greatest difficulties is to design contract incentives that reward
performance the government wants to achieve while also ensuring that the condition
of the physical assets improves.
The World Bank Page 199