Business Organization



First Building Block: Business Organization

Most government authorities trying to operate in a commercial environment share the dilemma posed by government management incentive structures—a built-in bias for bureaucratic objectives, political goals, and public services rather than market advantage, resource efficiency and commercial gain.50 Railways share this dilemma. If they are run as and by public departments and authorities they are ill-equipped to compete in a tough external business environment.

Archetypal railways have always been captive to bureaucratic pressures, which can undermine their commitment to serving customers. Multiple constraints include: (i) accountability measured-by-process (‘box-ticking’) rather than results; (ii) vulnerability to short-term national budgeting processes that destabilize longer-term business and investment planning; (iii) public service employment norms and procedures that impede commercial operations; (iv) political patronage or seniority as a basis for selecting board and senior management, rather than merit; and other constraints. Many examples of these influences exist among state-owned railways of both developed and developing countries.

Many governments suffer from fuzzy thinking about railway industries. Some view railways as a conduit for social values, but then invariably want state-owned railways to operate efficiently enough to compete successfully against other transport modes. Examples abound of political pressures thathave undermined commercial outcomes when railways must comply with government directives to offer discount freight rates to strategic industries, maintain artificially cheap fares for passengers, continue to run trains on lines where passenger demand can hardly fill a single coach, reallocate investment to areas of greatest political visibility, and avoid any labor force reductions that might erupt into an industry-wide disruption.

By comparison, the road passenger and freight transport industries are intensely competitive and mainly privately-owned. Most political pressures are visible and transparent and road transport is not an implicit conduit for transmitting social benefits to the industrial sector or labor unions, or scoring political points for re-election.

There are three main corporate forms that can help improve the performance of the archetypal railway organization by reducing bureaucratic demands and political pressures: a state-owned enterprise operating under a specific railways law or state-owned enterprise law; a state-owned company under companies law; or a privately-owned company under companies law. There can of course be more than one entity in any industry structure (see ). In any particular country different legal challenges might be faced with the different structures regarding asset holding, accounting methods, taxation and transfer of staff to new entities. The choice of corporate form is therefore complex and what follows focuses on generic features.

    


50 Good bureaucracy is essential to government administration and accountability; and bureaucrats have an immediate responsibility to support the policies of political leadership.
Copyright ©  The World Bank. All Rights Reserved.