INTRO: Kazakstan’s Transport Minister Erkin Kaliyev believes freight and long distance passenger operations can reward private investment, but replacing bureaucratic controls with a commercially-minded management is not going to be easy
THERE IS a long way to go, but the direction has been set. ’The railways of Kazakstan have embarked on the road towards a market economy’, Transport Minister Erkin Kaliyev announced earlier this year when setting out his government’s Programme for Reorganising and Revitalising the Railways (RG 4.98 p226).
Kaliyev is also General Director of Kazakstan Temir Zholy, the state railway organisation. This inherently unsatisfactory combination of political and executive control was normal in the former communist bloc, and lives on today in most of the former republics of the USSR.
From 1991 to 1996, the railways in Kazakstan were strictly in survival mode. Freight plunged from 407 billion tonne-km in 1990, the last year before the break-up, to only 108 billion in 1996. Passenger-km held up well at around 20 billion until 1993, but the official figures dipped sharply to a low point of 13·2 billion in 1995 before recovering somewhat in the two following years.
These figures do not reflect the scale of the financial crisis which hit the three regions of the former Soviet Railways operating within Kazakstan’s frontiers. These were only merged to form KTZ last year, with operations now organised as five geographical regions.
After 1991, a number of freight shippers began to delay and even withold payment of invoices for traffic moved; major defaulters were the coal mines. But KTZ was instructed by the government to go on moving the goods anyway because of the impact on the economy, and on currency which the country was receiving from other states for Kazak exports.
Arrangements for settling charges between national railways for cross-border traffic and interchange of rolling stock, formerly done centrally in Moscow, broke down. And in a period of high inflation, a payment delayed for a year or more might only be worth a small fraction of the original debt.
On the passenger side, fare evasion and fraud emerged as a massive problem. A study which KTZ commissioned from Gibb Rail last year into ways of privatising the passenger business found that recorded revenue was only 38% of the 18bn tenge that selling 100% of the seats available would earn at the standard domestic tariff of 1·25 tenge/km. Yet the trains were consistently full!
As passenger-km statistics are based on ticket sales, it would appear that the actual volume of domestic travel may not have fallen much, if at all, over the past decade. International travel must have declined because fewer trains ran, and crossing the newly created frontiers presents a barrier to movement.
Freight statistics, in contrast, are derived from tonnages loaded and invoiced, with non-payment treated as bad debt. They should therefore reflect more accurately the true situation.
One reason for the loss of more than 70% of tonne-km since 1990 is a massive drop in cross-border freight due to the replacement of the USSR’s centrally planned economies by domestic markets, each striving to become self-sufficient.
In holding on to such trade as does take place, KTZ is seriously hampered by the loss of managerial control over what happens beyond its borders, and by the flourishing bureaucracy associated with newly-established frontier controls, especially customs. Both factors weaken rail’s competitive position against road, with lorry drivers talking their way through in an hour or two whereas rail hold-ups are measured in days.
Upturn in 1997
Kaliyev sees last year as a turning point in the fortunes of KTZ. Both freight and passenger traffic grew, and gross revenues were up by no less than 38% in hard currency terms to reach a total of US$1·1bn.
Some of this was easily won. For example, a blitz on fare evasion and fraud during the first four months of 1997 produced a remarkable 50% increase in revenue during April, compared with December. Given that long distance domestic and international travel is handled at only 82 stations in this sparsely populated country, Gibb Rail recommended that access to platforms should be restricted to those with valid tickets.
For six years, the railways kept going by patching up and cannibalising rolling stock and other assets that were already technically obsolete, and in many cases life expired. This was only possible because of the drop in traffic. With Kaliyev predicting 200 million tonnes of freight in 2000, almost double the 1996 figure, major investment is urgently needed.
Soviet Railways achieved remarkably high productivity of assets up to 1990, with tonne-km per wagon substantially above the levels found in the USA and Canada. Gibb Rail concluded last year that fewer than half of nearly 100000 wagons on KTZ’s register were in regular use. Out of more than 3000 diesel and electric locomotives, the passenger timetable requires 330 in use, while freight operations, on average, require 810. Most are permanently coupled twin-units, each counted as one locomotive.
While this make-do-and-mend policy worked for a time, the cash flow shortage meant that spare parts could not be purchased. As overall fleet availability continued to fall, operational performance began to suffer.
With the upturn in revenue, currency is now becoming available for improvements. Following conversion in 1997 of half a 2TE10 twin-unit diesel locomotive at Erie, Pennsylvania, to prove the concept, General Electric is shipping a further 31 kits to Kazakstan so that 16 of the 2TE10s can be re-engined.
The kit takes the form of a subframe carrying the 7FLD12 engine coupled to the traction alternator, plus rectifiers and associated auxiliaries. Components such as the air compressor, radiator and fan are supplied separately for mounting within the loco body. The original bogies and DC traction motors are retained.
If this rebuild is successful, more orders are likely to follow - and not just from Kazakstan, as similar motive power situations are to be found all over the former USSR.
Privatisation agenda
Kazakstan is rich in oil, gas and coal. Metals such as iron, copper, magnesium and titanium are also mined, and there is a productive agricultural sector. Privatisation has already started, with minority shareholdings in the state companies exploiting these resources currently being offered through western banks such as Credit Suisse First Boston.
KTZ is some way from that stage. Mercer Management Consultants, in a study funded by the European Bank for Reconstruction & Development, proposed a switch to a European model with a Regulator and competing operators of freight and passenger trains, that was alien to the local culture and therefore difficult to comprehend.
KTZ is clearly not prepared for this level of sophistication. Present accounting methods are incapable of assessing accurately charges for motive power and rolling stock which fund replacement, let alone the cost of track use and train paths.
In terms of revenue, freight is at least 10 times larger than the passenger business. Moreover, Kazakstan is an immense country - ninth largest in the world in terms of area - with only 13726 km of railway.
This network provides strategic links between China and the Middle East and Eastern Europe, as well as between Russia and the southern republics such as Turkmenistan. Once the region recovers from the shock of the USSR break-up, and border delays are ironed out, Kaliyev expects that ’transit traffic will become the main source of income for our railways’, and notes that ’tariff flexibility will be a decisive factor in attracting international companies to our transit routes.’
With sound management and access to modern technology, KTZ should be able to move traffic between the border station with China at Druzba and the Russian frontier more than 1000 km away with great efficiency. Double-stacking of containers would be no problem, for instance.
Developing facilities at Druzba required to overcome the break of gauge between the USSR’s 1520mm and China’s 1435mm is therefore a priority. Two Japanese loan agreements are being used for this purpose, and for upgrading the Druzba - Atogai corridor.
Work is currently going ahead on a transfer station so that crude oil and refined products stored for transfer between tank wagons on the two gauges. This US$10m investment is being funded two-thirds by Canada’s Hurricane Hydrocarbons Ltd, and one-third by Kazak enterprise Eastern Gate. Unit container trains are planned to Bandar Abbas in Iran (4 400 km) and to Rotterdam (7 100 km).
Passenger plans
Gibb Rail advised KTZ that freight was likely to remain so dominant in sparsely populated Kazakstan that the commercially successful vertically integrated North American model was more appropriate than the highly complex and still experimental concept of infrastructure authorities being developed in Europe.
Meanwhile, it should be possible to privatise the passenger business. While local services around the bigger cities would require explicit subsidy, which is not being provided at present, Gibb saw no reason why long distance and international services should not be profitable - once they were freed from the straightjacket of a low, strictly per-km tariff.
A two year transition period was proposed before bids would be invited for the concession to operate passenger services. A passenger company with its own board would be created under the transport ministry, and this would become responsible for (but not necessarily own) stations, depots and rolling stock. Much effort would be required to establish activity-based costing and management information systems underpinning the new structure.
The first step towards privatisation would be to dedicate locomotives to passenger work. The private sector would be invited to bid for the maintenance and provision of rolling stock and traction, which accounts for some 39% of costs in this sector at present.
An important move for freight as well as passengers would be to bypass the central procurement agencies for railway spares, known as Zheldorsnab. They provide no assistance in inventory planning, but simply process requisitions for parts by the railway. Their presence seriously aggravates the spare parts shortages which are endemic on the railways.
Current policy
The programme set out by Kaliyev last January will establish competitive self-regulating markets for railway services, to be developed step by step. Efficient management methods are to be introduced to permit this, and tariff policies are be more flexible.
Meanwhile, the state is to retain ownership of all infrastructure assets, and also locomotives which are viewed as being of strategic importance. Social services which the railways have traditionally provided for their staff such as housing, schools and hospitals are to be transferred to local authorities.
Privatisation is to start, not with passengers, but with low density lines and industrial sidings. The model here is clearly the American short lines which have proliferated since deregulation in 1980. However, investment opportunities are to be created on the main lines.
One of the main reasons for not rushing into a major privatisation is the time needed to educate railway managers. Only a small core of KTZ people even claim to understand what commercial management is about. It is simply too early to think of empowering middle ranking managers, who understand very well how to keep trains moving under conditions of great difficulty, but not how to run them profitably. o
CAPTION: Top: KTZ offices at the main station in the former capital Almaty
CAPTION: The Kazak government is planning to build three new lines totalling 650 km to integrate the three ex-Soviet networks and to electrifiy around 800 route-km. The 13 726 km KTZ network handles around 86% of freight tonne-km
CAPTION: With its roof and upper bodyside panels removed, a KTZ 2TE10 locomotive stands ready for the installation of a GE repowering kit
Photo: GE
CAPTION: Much of the KTZ passenger coach fleet inherited from the Soviet railways is in need of repair and modernisation
En quête d’une économie de marché
Le ministre des Transports du Kazakstan Erkin Kaliyev pense que les trafics fret et voyageurs à longue distance peuvent être rémunérateurs pour l’investissement privé, mais remplacer une structure bureaucratique par un management du type économie de marché ne sera pas chose facile. Il considère que l’année dernière a marqué un tournant pour le chemin de fer de l’Etat, avec un trafic et des recettes en hausse, après le creux de la vague de 1995. Dans ce pays riche en pétrole, en gaz et en charbon, le besoin d’investissements est urgent si la prédiction de M. Kaliyev de transporter 200 millions de tonnes en l’an 2000 se réaliseDie Suche nach der Marktwirtschaft
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