Kalisz: Financing the restructuring of the municipal bus transport devision

Abstract:

Changes in the political and economic systems in Poland forced local authorities to respond to continuous demands for improvements to public amenity services at a time of severe financial constraints arising from new economic circumstances. In the early nineties, Kalisz City Authority took progressive steps to restructure and privatise public amenity services including public transport. A joint venture established between the City Authority and a West European partner firm, which managed to meet public demand to improve the quality of service, to secure the new company financially, and to generate profits for dividend and new reinvestment. The semi-privatisation of the Kalisz Municipal Bus Transport led to a more efficient transportation system with a better bus network, increased passenger numbers, increased wages of the employed. The restructuring reduced the need for buses and the number of employees but alternative jobs were secured for the dismissed workers.

This case study presents an efficient and progressive management mechanism for public transport related to the establishment of a joint venture. This successful experience in restructuring the municipal bus transport division can be further transferred to other Polish towns or to other countries in transition.

Background and objectives

With the change of the political and economic systems in Poland, self-governing local authorities face the unenviable task of responding to continuous demands for improvements to public services at a time of severe financial constraints arising from new economic circumstances.

In 1991, when more than 13% of the City budget was allocated for public transport, there were no prospects for replacing the ageing fleet or introducing a higher standard of services. In this respect, Kalisz was not unique. Currently, it is estimated that most local authorities are still spending 20% or more of their budgets on transport, if the cost of fleet replacement and of servicing the bus transport division is added to the subsidy provided by the state or the municipality. Furthermore, there are only a few bus transport divisions or single ownership companies (belonging to the city) in Poland at present which are capable of reinvestment derived from generated income. Kaliskie Line Autobusowe (KLA),or Kalisz Bus Lines, is one of these.

The project for reconstruction was made mainly because of the rising costs of transportation activity, which in 1991 took 13% of the city budget and in 1997 - 4.6%.

The objectives of the joint venture are:

• to meet public demand and to improve the quality of service;
• to introduce a new model for financing public bus transport;
• financially to secure the joint venture; and
• to generate income to raise employees' wages, dividends and reinvestment.

Implementation

Project date and status

The project started on 13 May 1994.

The restructuring was successfully completed and the new system has been in operation since 1994.

Strategy

The strategy applied to improve the transport system in Kalisz included the involvement of foreign investors, in co-operation with local authorities, through investment in know-how and /or capital.

The local authority has strategic control over the public transport system while the day-to-day management is separated from the city and is the responsibility of the Joint Venture Company. The Western firm entered the joint venture with its know-how investment supported by finance necessary for training and small amounts of equipment. The know-how brought a new commercially designed network, management expertise to assist the KLA Management to implement changes (and to encourage further development), and a new system of accounting with the City based on contractual arrangements and not on subsidies. The foreign partner, having an interest in securing his investment, ensured the continuous input of know-how to the Company and, being outside of the system, acted as a catalyst in the restructuring stage maintaining independence from local affairs.

Activities

A joint venture was established between the City and a foreign firm. This was the beginning of the restructuring of the management, financing and organisation of the bus transport system in Kalisz.

The need for restructuring the transport company was due to:

• the rising costs of the activity;
• low quality and uncompetitive services offered;
• sophisticated organisation structure;
• lack of independence for the company in the decision-making process; and
• unclear ownership status.

Some of the activities realised during the restructuring were:

• the introduction of a new management structure with financial and commercial sections, with performance accountability being introduced,
• the improvement of the bus network,
• a reduction of the number of buses,
• a reduction of the employees from 366 to 258, which occurred over 3 months during 1997. This change went together with the introduction of an alternative employment policy. The dismissed employees were offered the work in the companies, which are responsible for cleaning of the buses and the offices. Some loans were given to dismissed workers to start their own business.

Partners

The major partners in the joint venture are the local government of Kalisz and the foreign company from England.

The groups which have effect on the operation and success of the venture are the local government of Kalisz, the Trade Unions, the foreign partner, the management of the newly established company, and the public.

Financing and resources used

In 1997, 4.6 % of the City of Kalisz' budget was allocated for public transport compared with over 13% in 1991.

The investments were as follows:

• 1991-1994, the City investment was 24,203 ECU
• 1994-1997, Kaliskie Linie Autobusowe's investment was 1,748,016 ECU

Results and Impacts

The effects of the semi-privatisation of the Kalisz Municipal Bus Transport are as follows:

• abetter network. The length of the network was increased from 175 km to 209 km.
• a reduction of the fleet from 98 to 73 (1994) and to 68 (1997). The number of buses was reduced as a result of the reorganisation of the network and the more efficient use of the buses.
• an increase of vehicle kilometres from 385,000 to 441,000 during 1997.
• a change in employment level from 366 to 258 employees occurred over 3 months during 1997. This change went together with the introduction of an alternative employment policy. The dismissed employees were offered work with the companies which are responsible for cleaning the buses and the offices. Some loans given to dismissed workers to start their own business.
• the introduction of a new management structure with financial and commercial sections.
• the introduction of annual contracts as a new system of financial and performance accountability between the Company and the City Authority.
• an increase in wages by 164% from 133.66 ECU to 352.83 ECU per month between 1994 and 1997. (one of the highest average wages in that sector in Poland).
• an increase in passenger numbers from 9,390,000 (1993) to 14,093,000 by 1997. The number of passengers during 1997 reached 20,215,000.
• the overhaul of 22 buses and the purchase of 6 new buses (from the firms Volvo and MAN)
• the implementation of reinvestment programmes in buildings, energy (ecological boiler house), equipment, high-tech resources and training.

The company was turned from deficit (1993) to profit making (1996) as a result of the dedication of the employees, the foreign partner's know-how; and the support of the city management.

Barriers and conflicts

There were cultural and linguistic problems on both sides which caused mutual misjudgement between the foreign investor and the administration. This is an extremely dangerous situation in the formation of a joint venture partnership.

The trade unions' input to the company's success must never be underestimated. Until such time as the Polish Legal System relaxes the overprotective laws in respect of the unions, and union activists in particular, Polish management, employees and companies will not be able to achieve top performance.

The management of the newly established company may initially under-perform due to old habits and establishing itself in the new business environment. Similarly, the employees, who face dramatic changes, job uncertainty and new work ethics may also under-perform.

Lessons learned and transferability

It is difficult to reach a consensus among the City Council, union activists, the Unions, and the public, who as customers, are on the receiving end of all the changes.

The importance and value of know-how as a form of investment are greatly underestimated. Intellectual properties, as an investment, are a new concept. One may argue that know-how is intangible, but the results are measurable.

Investors from Western countries, who can help with know-how on strategic development of CEE companies are needed and helpful. There is a tendency to overlook the fact that the investor expects a return in terms of profit-sharing and dividends.

There is a tendency in Poland to resent the use of foreign expertise (but not the foreign money) on the grounds that there is indigenous expertise available. In some cases this may be true. It is, however, the quality of expertise, the particular know-how and not the nationality of the expert which should be the decisive factor.

Investment in Polish public transport must be viewed as a long-term policy. Despite a larger number of fare-paying passengers than in any of the EU countries, the differential between western prices for vehicles, fuel and spare parts on the one hand and the domestic purchasing power of the zloty on the other is too great to provide profits similar to those achievable in the EU. The investment required, due to the historical neglect of the fleets in most Polish companies, severely limits any dividend potential at present.

The common misconception of Polish public transport planners and providers is that major capital investment in a new fleet resolves all problems. Without seriously redesigning the networks and restructuring the operations, this approach only produces short-term gains and has disastrous long- term consequences .

Some other lessons which can be learned in connection with this case study are:

• the trends indicate that the economic differential is progressively decreasing thereby generating revenue;
• once annual contracts are agreed, Polish local authorities are generally reliable business partners; and
• when the economic situation makes public transport profitable, the Polish market will become more homogeneous making it more difficult for the foreign investor to enter.

Source of Information

Ozmin, M. J., Financing Public Transport - Joint Venture, An Alternative Model, Experience in Restructuring the Municipal Bus Transport Division in Kalisz, Poland - The Way To Success,

Ozmin, M.J., Restructuring the municipal bus transport service in Kalisz - EA.UE: Urban transport in central and eastern Europe, Berlin 1998, p.19ff

Contact:

Cities:

Kalisz :

Kalisz is one of the oldest cities in Poland located in the West of the country, at the eastern edge of the Nizina Wielkopolsla plain. Its name is connected with the historical way that amber was transported from North to West in the Middle Ages.

The population is 106,758 people. The leading economic activities are agriculture and an associated food processing industry. There are also some branches of light industry -textile, clothing, construction materials, glass and ceramic , wood and paper industry, the manufacturing of pianos being the most famous for this city.

During the recent years the city quickly underwent renovation and reconstruction of the buildings. Many new activities related to business and services become widespread.

Population:

Project was added at 19.06.1998
Project was changed at 19.06.1998

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