Posted by Vince Wadhwani on Feb 26, 2007

I was lucky enough to sit down with a high level Ukrainian Railway delegation last week. They were in Washington, DC to discuss their plans to split the former Soviet railways into 4 vertical groups. As I sat there and listened I couldn't help but wonder whether they saw the impending doom and chose to ignore it or whether there was a silver lining that would allow some personal benefit at the expense of the country.

"We are following the Russian model [for privatization]" they declared. By the end of the decade, they would start splitting into 4 distinct companies each with its own profit motive:

  1. Passenger Rail
  2. Freight Rail
  3. Repair
  4. Infrastructure

It actually seems to me that they are following a combination of several bad models around the world. Let's see what will work:

1. Passenger Rail as a profit center. Truly, passenger rail has the potential to be profitable. In the US it can never happen because Amtrak is forced to operate non-profitable segments. I'm sure this would also happen in Ukraine making it a deal breaker. Remember that the average EU country gets about $22 Billion per year to operate their passenger rail networks.

Where disaster lies is in the ambiguous promise to open up the railway to foreign competition. That means that many of the lucrative segments may see operators from other countries driving down prices in the few spots that passenger service might make money.

2. Freight Rail as a profit center. Clearly the big winner in the deal, freight rail can make hoards of money by moving around all the things that make business go. Coal, chemicals, cars, you name it. If it's heavy or hazardous, it goes by train. Pound for pound, the train is the most environmentally friendly way to transport. Like in the US and every other major country, I expect that this division will do really well. Of course, if foreign competition is allowed here as well, things could be very different.

3. Repair as a profit center. I won't spend too much time here but let's just say that it's important to keep a railroad running. Sending out a train or component across the sea to be repaired isn't very smart in the long-run though the short term cost savings could be interesting. So in effect, a repair division will also do really well until such time as private competition arrives. But that's just capitalism and, for the repair division, I'm ok with letting it go full steam ahead without any checks.

4. Infrastructure as a profit center. Here is where the grand disaster is. Even with foreign operators running, chances are there will be only one customer (two if you count passenger/freight). It could be somewhat good or very bad. Recall the bankruptcy of this branch in Britain's privatization bid back in 2001.

So what is Ukraine thinking? Who knows. But in the US the motiviation clearly lies with the fact that the less successful branch (passenger.. i.e. Amtrak) is less able to lobby Congress since it makes no money. And it cannot compete with the big dollars already in the pockets of car companies, truck operators, airlines, and other special interests. So despite Rail being so good for the country and the environment, unless the people stand up, it is doomed to fail.

By contrast, China is unveiling a different plan. By 2010, they'll add 10,540 miles of new track, of which 4,340 will be dedicated to high-speed passenger traffic with top speeds of 200mph. They'll electrify 9300 miles to accommodate electric and diesel trains and increase the maximum speed of freight trains on all their lines to 75MPH.

By 2020, they'll almost double their high speed capacity. Their total rail network will be one of the largest in the world at over 62,000 miles.

Now, I'm not advocating communism! But, what I am pointing out is that one country, despite its other faults, has gotten the railway segment right. So instead of following the broken US, British, or Russian models, it might be in the interest of the citizens to take a look at what China is up to.