Estonia is on course to be the first former Soviet state to transfer rail operations to the private sector. Richard Hope reports keen bidding for rapidly growing transit freight through the port of Tallinn, although thereis a tussle over passenger subsidies

ESTONIA is the smallest of the states which broke away from Russian domination when the Soviet Union disintegrated a decade ago. With a population of barely 1·5 million served by 1200 km of railway, and nowhere more than 240 km from the capital, traffic prospects cannot have looked good as customs and immigration controls were imposed at the frontier stations with Russia and Latvia.

Lines still in operation today total 1019 km. Routes no longer in use include the border crossing to Latvia at Moisaküla. International connections are maintained with Russia at Narva and Pechory-Pskovskie, and with Latvia at Valga.

Yet there is strong interest in the tenders announced during April to purchase from the government a majority shareholding of 66% in Eesti Raudtee (Estonian Railways Ltd, EVR). For example, a transport ministry spokesman said that six US firms had made inquiries about the deal; they are understood to have included CSX as well as short line operators Rail World, OmniTrax and UniRail.

Controversy has been generated by the evident desire of the Finnish state-owned railway company VR Yhtyma to win control of EVR. This stems from the fact that EVR carried 37·1 million tonnes of freight in 1999, a massive increase on the 24 million tonnes moved annually in the first five years after EVR was formally carved out of Soviet Railways on January 1 1992.

As might be expected in such a tiny country, 80% of this tonnage moves across Estonia's borders, and virtually all of the growth is in transit between Russia and Tallinn, now the second biggest oil port in the region (only Ventspils in Latvia handles more). EVR carried 18·8 million tonnes of oil products in 1999, and as there is no pipeline across Estonia, most of this represented Russian exports by sea.

In a situation where Estonia is competing successfully for a larger share of transit freight with VR Yhtyma, as well as Latvia's and Lithuania's railways, the dangers of being controlled by Finnish interests have not escaped EVR Chairman of the Council Ardo Ojasalu. 'I very much hope that the organisers of the privatisation have enough common sense to turn down the Finns' offer', he told the Financial Times in April.

The government's expectation is that a decision will be made later this year to hand majority control of EVR to the successful bidder. Given the growing importance of transit freight revenues to the national economy - and the fact that tonnage was up 48% year-on-year in the first quarter of 2000, few observers expect it to be VR Yhtyma.

Privatisation progress

Significant as this step will be, it follows major restructuring that has already transformed EVR.

Two Railway Acts that came into force in January 1995 and May 1999 provide the legal basis for restructuring and privatisation of EVR. Also important is a Commercial Code applied in September 1995, which ensures a degree of independence for the directors and managers of railway companies even when all the shares are still held by the government.

The first significant introduction of private sector management occurred in 1996. EVR Koehne Ltd was formed as a joint venture of EVR and Hermann Koehne GmbH of Germany charged with maintaining the infrastructure. The major task undertaken has been upgrading of the principal freight corridor between Tallinn and the Russian border at Narva. Long-welded rails secured by Fastclips to concrete sleepers replaced 70 km of the old track, with the gauge widened from the nominal 1520mm to I524mm to reduce wear of rail and wheels.

In June 1997, the government approved a plan to reorganise and privatise EVR, which became a limited company from October 2 1997.

At the same time, the former 750mm gauge network linking Tallinn with Pärnu and Viljandi totalling 265route-km was split off from EVR as a separate business known as the South-West Railway, complete with its own subsidy. Edelaraudtee AS operates two or three passenger trains a day on each route, as well as maintaining its own infrastructure. The line extends beyond Pärnu to the Latvian border at Moisakül, but this is currently out of use. In 1999 Edelaraudtee carried 3·16 million passengers and 300000 tonnes of freight.

Another operator, Haapsalu Railway, manages the infrastructure and carries freight on the 61 km of line between Riisipere and Haapsalu, performing a similar function to short lines in the USA.

EVR is now purely a freight operator employing 4500 staff at the end of 1999, and managing 693 km of infrastructure maintained by EVR Koehne Ltd. Just three years earlier, the staff totalled 7600. However, it has shareholdings in two passenger companies, one of which is part-owned by the private sector.

EVR Ekspress Ltd began trading on April 1 1999 as a result of an agreement signed in November 1998. This provides for 51% of the shares to be held by the Estonian private company Fraser Group Oy, and 49% by EVR. Control of policy thus resides with the private sector and not the state-owned railway operator. With 150 staff, EVR Ekspress is purely a passenger train operator. In co-operation with Russia's October Railway, it runs the overnight trains to Moscow and St Petersburg, using EVR's infrastructure. The company carried 175000 passengers last year.

The other passenger operator is Elektriraudtee Ltd, which began to function independently on January 1 1999 although it is still 100% owned by EVR. The only electrified railway in Estonia comprises 132 km of the main line passing through Tallinn, on which Elektriraudtee carried 3·43 million passengers in a fleet of EMUs drawing power at 3·3 kV DC. It is effectively a commuter service employing 260 staff.

Domestic inter-city services over the EVR network are currently operated by Edelaraudtee, including two or three trains a day from Tallinn to Narva, Valga and V?€?ru. There is a daily connection at Valga to Riga, but through trains no longer link the Estonian and Latvian capitals.

Edelaraudtee up for sale

The South-West Railway may be a small operation, but business is holding up despite the increasing competition from private cars. The operation is far from profitable, with fares barely a tenth of those in some EU countries. And like the rest of the network, infrastructure and rolling stock is badly in need of investment.

At the end of last year, Edelaraudtee's Financial Director Kalmar Keevend was expecting turnover to reach 210m kroons, with revenues up by 8%. However, turnover includes a subsidy of some 150m kroons.

Edelaraudtee was offered for sale outright, complete with its local infrastructure, and with no time limit on ownership. GB Railways was nominated last year as the preferred bidder. Negotiations appeared to be going well, and the company had hoped to close the deal in May.

GB Railways was formed to bid for passenger franchises during Britain's privatisation, and now runs Anglia Railways linking East Anglia with Liverpool Street in the City of London. This year the firm moved into freight with a contract to move engineering materials for Railtrack.

Issues that have proved difficult to resolve include access to Tallinn over track owned by EVR, although EVR insists that access to the national network is enshrined in the Railway Act and there should be no problem transferring Edelaraudtee's existing rights to any new owner. However, the main sticking point has been the amount of subsidy required if the purchaser is to invest in new rolling stock for Edelaraudtee services.

When GB Railways put in its bid more than a year ago, it was told to assume that subsidy would continue to be paid at about the same level as before. Fares will continue to be controlled, although they could be increased if the service is improved.

This was challenged when the deal was presented to Parliament. Early in April, the transport ministry presented MPs with an alternative plan that would see subsidy continue at 80% of the current rates for 10 years. In return, some of the less profitable trains would be discontinued.

The situation was complicated by CGEA of France, now trading as Connex, which originally demanded much higher subsidy than GB Railways wanted. As Parliament was considering this issue, Connex changed track and said that it would accept a lower subsidy tapering to zero over a number of years. A German company with no railway operating experience made a similar offer.

In May, Parliament approved the subsidy for GB Railways at the level of 845m kroons spread over 10 years. At this point the Transport Minister announced his intention to re-tender separately the domestic passenger services to Narva, Valga and V?€?ru which run entirely on EVR tracks. The rest of Edelaraudtee would be sold separately as a regional vertically-integrated operation, but this was not the basis on which GB Railways had submitted its bid.

  • CAPTION: A long distance passenger train (right) waits to leave Tallinn, next to a local EMU belonging to commuter operator Elektriraudtee
  • CAPTION: Heavy freight traffic is handled by this terminal at the port of Muuga near Tallinn
  • CAPTION: Reconstruction work is under way to upgrade the main transit route from Tallinn to the Russian border at Narva


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