ASi" kUCTURE FlOR DEVELOPMENT

Box 3.1 Divided they stand: unbundling railway services
As infrastructure markets, technology, and operating services evolves, and not al the commitments made in
practices have evolved, the need for single ownership the franchise agreements will be honored because some
has diminished-even in such traditionally monolithic requirements imposed as part of the franchise award are
operations as railways,
likely to be unsustainable.
Arg...fix. In 1989, folowing years of bad serce-. Pol1is Polish Railways(P)is restrucuing its
heavy losss, and government subsidies as high as I per- monolithic railroad system along its principal lines of
cent of GDP (9 percent of the public sector budget), the business: conumercal freight (primarily coal), intercity
Argentine.railway began to transfer operational respon- passenger, international passenger, and local and subursibility
for many services to the private sector.
ban passenger services. Eventually, PKP is expected to
All services were transferred on a concession basis have an infrastructure department servicing institution-.
most loss-nmakng lines and services were dropped, and ally separated lines of business, with suitable nondisthe
railways surplus assets were sold. There were five criminatuy compensation for track use paid by each line
freight concessions, seven suburban concessions (indud- of business (in line with European Union directives).
ing the Buenos Aires subway), and a remnant of intercity Suburban passenger activities will be spun off to local
passenger service that was transferred to provincial gay- agencies or covered under "contracts" with national or
ernments. In Buenos Aires the new company established local govenments to provide unremunerative public
to take over Argentina Railways' suburban operations services in return for adequate compensation. PlCP wvill
transferred the relevant lines to the new concessionaires transfer its liabilities (mainly surplus labor) and noruail
and then regulated and coordinated all transport issues in assets (mainly urban real estate) to a new authority. It
the area. A metropolitan authority was also established, wfll also seek to transfer its nonmailway activities to the
in their first two years of operation, the new railways pnvate sector
carried about the same traffic as before (a downward This reorganization wi separate coumercial sertraffic
trend has been reversed), with only 30 percent of vices (unregulated and unsupported) and public serthe
labor force Freight rates are fallng, service is im- vices, such as urban and suburban passenger servces,
proving. and the level of annual govenmment subsidies rural lines, and certain lines of strategic importance. The
has fallen fumS800 million to $150 million. Some of the publicservices are to be planned and paid for bv public
franchises will have to be reconstituted as demand for authorities at appropriate levels.
The range of market alternatives.
* Priuatization of monopolies. Where monopolies
persist transfer to pnvate ownership g,nerally
Once sectors have been unbundled, competition can yields efficiency gains. Regulatory innovations that
be used to increase efficiency and new investmenL reward performance (such as price caps and other
Ln infrastructure services, the choice is not simply incentive mechanisms, discussed below) create the
between unfettered supply in the marketplace and basis for continued productivity growth.
monopoly government supply. Four intermediate Moving an existing enterprise to more marketarrangements
for market-based provision are possi- based provision can lead to one or more of these
ble, and often advisable. Three of them promote arrangements (Figure 3.1). Competition for thecompetition.
The fourth, private monopoly, creates market is Option B, public ownership and private
the basis for greater accountability through a harder operation (see Chapter 1); the remaining three
budget constraint and more explicit regulation than arrangements are variations on Option C, private
govermnent monopoly.
ownership and operation.
* Competition from substitutes. The threat of losing
customers to suppliers of substitute products Competition jiDn substitutes
provides motivation and discpline.
* Comtpetition hi inzfrastructure markets. Multi- Competition from substitutes is frequently disrepie
providers compete directly with each other, garded in discussions of natural monopolies in inwhile
government regulatory control ensures fair frastructure. Failure to take it into account can result
competition.
in perverse consequences. Energy and surface trans-
* Competition for the market. Governments create port are the two most important areas where comcompetitive
conditions through leases or conces- petition from substitutes brings pressure to bear on
sions, and firms compete not for individual con- the monopoly supplir±ez
sumers in the market but for the right to supply tlhe A natural gas provider may be a monopolist, but
entire market.
natural gas is only one possible fuel for the genera-
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