Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

Railway Reform: Toolkit for Improving Rail Sector Performance
5. Creating the Industry Structure
on the choice between an SOE or SOC, and more on whether governments build
in the reinforcing mechanisms described earlier, whether they then respect the
mechanisms they create, and whether they adopt a robust contractual system for
any budgetary support.
Box 5.1
State-owned Enterprise vs. State-owned Company
Why choose a state-owned enterprise (SOE)?
• Because an SOE can be constituted with bespoke
objectives, structures, and accountability
• Because SOEs have worked well in other sectors in
the country
What are the most favorable circumstances?
• National SOE legal framework and law are welldeveloped
• Government has strong capacity and willingness to
meet its obligations and exert its rights only within
the SOE framework
• The SOE has explicit contractual mechanisms for
any government budgetary support
What are the least favorable circumstances?
• National SOE legislation or experience is weak.
• The railway is highly politicized and public governance
capacity weak so that an SOE structure cannot
prevail against day-to-day intervention.
• Budgetary support is necessary but unstructured and
unpredictable.
Why choose a state-owned company (SOC)?
• Because an SOC is more rigorously constituted at
‘arm’s length’ from government with more commercial
objectives, structures, and accountability
• Because an SOC relies on the provisions of the
Companies Act and does not require custom design
• A well-developed framework of company law has
worked well when applied to government businesses
• Government has strong capacity and willingness to
meet its obligations and exert its rights only within
the framework of company law and according to
the company constitution.
• The SOC has explicit contractual mechanisms for
government budgetary support.
• When the company’s ability to fail is clear and a
politically acceptable framework for the fate of
public assets can be put in place.
• National corporate legislation is weak.
• The railway is highly politicized and public governance
capacity is weak so that a SOC structure cannot
prevail against day-to-day intervention.
• Budgetary support is necessary but unstructured
and unpredictable.
• Consequences of company failure are unclear.
5.2.3 Privately-owned company
A joint-stock company owned by private shareholders is the most commercial
structure for delivery of rail transport services in competitive markets. Private
companies have much stronger incentives to improve commercial performance
than SOEs or SOCs, and much stronger alignment between managers and shareholders
on improving the bottom line.
Conversely, though private companies will deliver social benefits if they happen
to coincide with their commercial goals, they have no inherent interest in using
rail transport to achieve social outcomes, except as a public relations strategy.
Therefore if governments wish to capitalize on the strengths of privatized railway
entities and protect or pursue other public interests, they must adopt contractual
The World Bank Page 70