INTRO: Four years after the amicable separation of Finland’s rail infrastructure administration and restructuring of Finnish State Railways as a profitable commercial company, the government has decided to introduce more competition. Chris Jackson discussed the implications with RHK Director-General Ossi Niemimuukko and VR Group President & CEO Henri Kuitunen
ON APRIL 8 the Finnish Ministry of Communications published a draft bill to open the national rail network to competition for all freight and some passenger traffic. Unveiling the proposals, the Minister Kimmo Sasi said the intention was to put the bill before parliament later this year with the aim of having the law on the statute books and open access in place by the end of next year.
In theory at least, the Finnish network has been open to international intermodal groupings under EU directive 91/440 since the restructuring of 1995. This created the National Rail Administration (Ratahallintokeskus, RHK) and transformed Finnish State Railways into a holding group with operating and track maintenance subsidiaries. But RHK Director-General Ossi Niemimuukko admits ’we have not had any applications so far.’
The new bill is based on a report prepared last year by a working party of Ministry and RHK officials. This envisages that moving to a totally open network for domestic and international freight operations will boost rail’s market share from the present 25% of tonne-km. Because Finland’s small population is widely dispersed, the intention is not to deregulate long-distance passenger services. However, local trains around Helsinki and in rural areas will be franchised on the basis of competitive tenders and specifications issued by local authorities.
The Ministry will license the operators, although in practice RHK will probably be asked to make a preliminary assessment of the applicants. RHK will also administer track capacity and co-ordinate timetable proposals to optimise network use. Signalling and regulation will still be contracted to VR Group, although it may prove preferable to set up a separate business unit to ensure transparency, as in Sweden. ’We will wait and see what happens first’, suggests Niemimuukko.
VR Group President Henri Kuitunen is concerned that the current proposals ’are not for a gradual transition, but for a total deregulation of freight traffic overnight.’ He is particularly concerned that open access operators will be looking to attack VR’s core markets. ’The biggest argument in favour of competition is that service levels will improve and the prices charged will go down. I am concerned that the risk if we can’t handle it will be quite different; it is very possible that prices will go up and the service level and network size will be reduced.’
With VR’s present cost structure, ’if we lose turnover in competition, we lose profits. And a shareholding company cannot lose money. We must find ways to cut the losses, by raising prices or withdrawing from some traffic, such as the low-volume markets.’ In Kuitunen’s view ’more restructuring is not the solution. We need to go on improving our cost-effectiveness, as we have been trying to do for more than 10 years now.’
RHK has had no formal approaches yet from potential operators, although some firms tendering to run bus services around Helsinki have informally expressed interest in the commuter business. On the freight side, Niemimuukko expects that ’some major industries may be interested, but are holding back from discussions’. Judging from experience in other countries, he suggests they may not actually want to run their own trains, but want to use the open access threat to force down VR Cargo’s rates.
Niemimuukko says the railways have been working well following the 1995 split. ’Operations and infrastructure have had separate accounts since 1990, so we have been working with this model for 10 years. The actual separation was really just to clarify the responsibilities and the role of the state. The Ministry of Communications and RHK were given clear responsibilities for the network.’
On the rail side, the main change was the legal restructuring of VR into a holding group and subsidiary companies, which required a change of accounting practices, but in Niemimuukko’s opinion ’the railway business has been getting steadily better since 1990.’ Since 1995 VR ’has had to live without subsidies’, and pay ’substantial track access fees’, compared to the nominal FM1m or FM2m allocated in 1990.’ Kuitunen emphasises that ’our concept really works; there is no doubt of that.’
Investment for upgrading
A key factor, according to Niemimuukko, is that ’with this separation, we have been able to secure the upgrading of the network. The state is more favourable, and has accepted the need for a rail network in the way it has for the roads. Investment is higher now than it has been for 20 years, and at the same time VR has been able to show a profit - which is good for the public and political image of rail.’
Access charges have been set at a comparable level to road taxes for buses and heavy lorries, to give what Niemimuukko says is ’the closest yet achieved to the mythical level playing field.’ VR only pays FM320m a year out of RHK’s total turnover of almost FM2·5bn. State funding is split into development projects - which are determined by the government - and renewals and maintenance, where the balance is decided by RHK.
Between the government, RHK and VR, ’we have been able to develop a common view of investment priorities and manage our spending. There may be some disagreement over the speed of fulfilment - VR thinks we are too slow - but at least we have had a tolerable investment budget.’
VR is also looking at investment to make its services more attractive. ’Over the last 10 years our capital investment has varied between FM300m and FM500m a year’, says Kuitunen. ’Now it is much higher; over the next 10 years we will be spending between FM800m and FM1·2bn a year’ (right).
Kuitunen says that ’VR’s passenger and freight operations are both profitable under the existing arrangements’, and VR-Track has had ’two lucky years’ in which extra business has enabled it to generate a profit too. The accounts for each business unit are kept separate and are ’fully transparent and open - there is no cross-subsidy between companies.’
But he is concerned that all the businesses have a relatively high proportion of fixed costs. ’With few variable costs to be saved, any downturn in traffic goes straight through to our bottom line. For every FM100 we lose in revenue, the profit drops by FM80.’ This is especially true for VR Ltd operations; ’our results in 1999 are not as good as the last few years, due to the general economic trend. Our Russian business is depressed, and now the Finnish economy is cooling as well. It is a very difficult situation, but we will survive.’
Niemimuukko sums up the position. ’The main point is that this way of working has been successful in Finland. It works, it really does. So the next step is to see if, or how, open access will work in our situation. I am convinced that it will work, but not without effort.’
Change is coming
Niemimuukko recognises that open access will change the relationship between RHK and VR. ’Although we have our own roles, the definition of the split was a bit vague. Over the past four years we have established a customer-provider relationship, but now it is time to take the next step to clarify the situation.’
Kuitunen points to a number of ’grey areas’, which will have to be addressed before open access can work, suggesting that ’there are big discussions to come.’ For instance, ’we need to determine exactly what the track access charge covers; it must be transparent and neutral for all.’ Another is the use of electric traction. Although RHK provides the infrastructure, VR purchases the power directly from the generating utilities and would have to determine how this could be recharged to a competitor.
On one point he is insistent. ’From our point of view, we cannot be expected to bear extra costs under the new regime, or we will not be able to face up to the competition.’ Kuitunen is concerned that international comparisons may be misleading: ’you cannot just look at other railways and copy them, because every system is fundamentally different; their railway structures and even their national economies are different.’
VR Ltd’s passenger turnover is currently around FM1·5bn a year. Whilst VR is no longer overtly subsidised, this revenue figure includes contractual payments of FM224m from the state to operate rural passenger services and FM190m from the Helsinki municipalities for commuter trains. Kuitunen explains: ’on many minor lines the passenger flows can never be profitable. We have to ask the question, whether the state will continue to buy the traffic.’
Under the open access proposals, operation of rural passenger trains will be put out to tender. Kuitunen says VR Ltd will be bidding fiercely to keep the business. As one key aim is to ’slope down’ the level of contract payments, he is keen to find ways of cutting costs. One approach is the acquisition of lightweight railbuses to replace the two and three-coach loco-hauled trains in use today.
With the prospect of more competition on rail, VR Group is trying to redress its balance between fixed and variable costs, ’but it takes time; there is not much you can do in one year.’ Kuitunen admits that ’in many respects railways are too slow; it will always take time to change them. Our competitors are much smaller, so it is easier for them to change.’ His strategy is to ’concentrate on the busiest sectors, where we are strong’, notably block freight trains, bulk flows, Russian traffic, and the inter-city and commuter businesses.
As an active player in the Nordic and European infrastructure managers’ forums, Niemimuukko highlights ’one problem which remains unsolved for all infrastructure managers: what level of service do you provide to the operator, and how do you compensate them for failure. In particular, what is the correct level and structure for incentive payments?’
To this end, he is keen to take soundings among ’end users’ - the passengers and freight shippers. ’Our customer is VR Ltd, but in order to appreciate what they are telling us, we need to understand their market. So we need to have our own feelers out, to assess the mood of the market.’ He can see situations where commercial constraints may mean ’VR’s decision could be different to what "society" wants.’
The open access proposals do not require VR to surrender any of its rolling stock for use by new operators; they must find their own equipment - although much of the business already moves in Russian wagons. The sole exception is a clause covering the EMUs for the Helsinki commuter operation (p397). Passenger stations will remain the property of VR Group, which must negotiate access for other operators, although freight companies would be free to own or share terminals.
The working party has not recommended outright privatisation of VR or the spinning off of business units such as VR Track or VR Cargo. ’The state is the sole shareholder of VR Group, which in turn owns the operating businesses, so it is up to the group management what they do with their business’, explains Niemimuukko.
Freight business dominant
Around 60% of VR Ltd’s turnover comes from its freight operations, which Kuitunen identifies as one of the group’s core businesses. A third of this is Russian business, and much of the rest is bulk flows for traditional Finnish industries such as forestry, paper, steel, and chemicals. During 1998 intermodal traffic rose by 20% as new piggyback services were introduced to Oulu and Kemi from Helsinki, Tampere and Turku.
Kuitunen is convinced that the best way of getting close to shippers in the high-value merchandise market and for international traffic to Western Europe is through intermodal hauliers. ’These expediters already have the skills, market knowledge and flexibility’, he points out. ’We now co-operate with several such companies who provide retail services, allowing VR Cargo to concentrate on the wholesaling business of managing the trunk flows.’
The vast bulk of VR’s international traffic is to and from Russia, with only small volumes moving in and out of Western Europe by train ferry or rail through Sweden.
Russian passenger traffic collapsed after the break-up of the Soviet Union in 1991, but has been growing steadily in the past few years. The two daily trains each way to St Petersburg and the overnight sleeper to and from Moscow are currently handling around 230000 passengers a year, compared to 280000 at the end of the 1980s. But Niemimuukko says further investment on the Helsinki - Vainikkala corridor will be dependent upon future growth.
On the freight side, VR classifies Russian traffic as ’eastern’ and ’transit’. Eastern covers the import of raw materials moving to Finnish industries for processing, whilst transit business moves directly to Finnish ports for export. Eastern traffic jumped 25% last year as the collapse of the Russian economy spurred the sale of raw materials to raise foreign exchange. Kuitunen says business in the first quarter of 1999 is 7% up on the same period in 1998.
Almost all transit business moves between Vainikkala and the ports of Kotka and Hamina. VR is currently handling just over 3 million tonnes a year, around half its previous level. Kuitunen says traffic in 1999 is running at just 35% of 1998 levels. This business has been hit hard by competition from the independent Baltic states. Estonia in particular has picked up substantial volumes of bulk export traffic at relatively low rates, but the condition of EVR’s track and security problems mean that VR has managed to keep higher-value traffic. A staple is petrochemicals, but this has been hit by the low world oil price. It is still a traffic which must be handled with care, as underlined by a derailment at Vainikkala on April 7 which resulted in a serious fire.
Some import business moves via the border crossings at Imatra and Vartius to reach industries in central and northern Finland.
Whilst RHK’s remit stops at the borders, the high proportion of international traffic moving on the network means Niemimuukko must keep a clear eye on developments elsewhere.
There is considerable substantial potential for extra business from Russian Karelia to move via Vartius with the completion of the 126 km NoWe Rail Link between Ledmozero and Kochkoma (RG 2.94 p101). Civil works for this were almost complete before the collapse of the Russian economy, but the private sector promoters hope to complete the tracklaying during this year’s short summer construction window.
Niemimuukko says RHK’s role is limited to ensuring the Vartius - Oulu corridor has sufficient capacity for the traffic on offer, but both he and Kuitunen have identified several business opportunities.
Relatively little freight moves by rail to and from Sweden at present, but this may change with the development of automated gauge changing equipment. Both the Talgo and DB Cargo designs for regaugeable freight wagons have been undergoing winter trials at Haparanda and Tornio respectively, and a decision is expected soon as to which will be adopted. Both Niemimuukko and Kuitunen recognise that the decision needs to be taken internationally. If gauge-convertible wagons are to be used efficiently throughout Europe, compatible equipment will be needed to link the 1435 and 1524mm gauge networks in Sweden/Finland, Poland/Belarus, and Hungary/Ukraine for example.
Sweden’s Banverket is currently looking at upgrading the link from Boden to Haparanda, with several substantial flows of business in prospect. The barges currently moving iron ore between the Malmbanan at Luleå and Raahe steelworks are due for replacement, and one option is to switch the traffic to rail. This would require upgrading for 30 tonne axleloads, and gauge-convertible heavy-haul wagons, but RHK International Affairs Director Kari Konsin sees the prospect of hauling 2 million tonnes a year as ’exciting’.
Another possible flow is cod from the waters off northeastern Norway to Russia. Around 100000 tonnes a year which is currently sent by ship could be railed from Narvik via Tornio and Vartius. Konsin says that a high-quality rail link from northern Russia to the ice-free port at Narvik could help justify the exploitation of huge reserves of minerals and other natural resources. Narvik is also well placed for shipment to North America via the Denmark Strait, and for import of machinery and finished goods from America into Russia and Eastern Europe.
TABLE: VR Group results in 1998
Net turnover FM m 6753 6181
(including government support)
Net profit FM m 386 419
Turnover by business unit (FM m)
VR Group 290
VR Ltd (rail operations) 3 500
VR-Track (infrastructure) 1 900
Pohjolan Liikenne AB (road transport) 1 100
Avecra (train catering) 470
Railtelia (telecoms) 170
VR-Data (data processing) 80
Avarra Oy (property) 60
Freight traffic million tonnes
Rail traffic 40·7 40·3
Domestic 23·6 23·6
International 17·1 16·7
Eastern 13·0 11·9
Transit 2·9 3·4
Western 1·2 1·4
Road traffic 7·4 5·0
Total 48·1 45·3
Rail tonne-km billion 9·9 9·9
Freight traffic by sector:
Passenger traffic million journeys
Long distance 12·0 12·0
Local 39·4 37·9
Helsinki area 29·3 28·0
Other 10·1 9·9
Road traffic 8·5 8·9
Total 59·8 58·9
Rail passenger-km billion 3·4 3·4
TABLE: RHK turnover in 1998 (FM m)
Government grant 2 180
Track access payments 320
Development projects 300 C
Traffic operations 200 A
Maintenance 600 B
Renewals 1 100 C
Real estate 50
A. Contracted to VR LtdB. Contracted to VR Track LtdC. Contracted to VR Track Ltd and other firms
’This way of working has been successful in Finland ... I am convinced that open access will work, but not without effort’
’The argument for competition is that service levels will improve and prices will go down. The risk is that prices will go up and the service level and network size will be reduced’
President & CEO
CAPTION: Long-distance passenger trains, which provide essential social links, will not be deregulated
CAPTION: Two further electrification packages will complete the wiring of Finland’s trunk network by 2005
CAPTION: Left: The dominant flow in VR’s Russian transit traffic is oil and petrochemicals moving from the border at Vainikkala to the ports of Kotka and Hamina
CAPTION: Alliances with road hauliers are helping to boost premium business including VR Ltd’s Transpoint piggyback operation, but paper and forest products still account for over 50% of domestic freight traffic
Open access threatens profitable harmony
Four years after the separation of Finland’s rail infrastructure administration and restructuring of Finnish State Railways as a profitable commercial company, the Ministry of Communications published a draft bill on April 8 to allow open access for all freight traffic and competitive tendering of local passenger services from the end of 2000. Chris Jackson spoke to RHK Director General Ossi Niemimuukko and VR Group President & CEO Henri Kuitunen about the increased levels of investment since restructuring, and discussed the possible implications of introducing greater competition
Le libre accès menace l’harmonie des bénéfices
Quatre ans après la séparation de l’administration de l’infrastructure ferroviaire de Finlande et la restructuration des chemins de fer de l’Etat finlandais devenus compagnie commerciale bénéficiaire, le Ministère des Communications a publié le 8 avril un projet de loi autorisant le libre accès au réseau pour tout le trafic fret ainsi que la mise en concession par appel d’offres de tous les services voyageurs régionaux à partir de la fin de l’an 2000. Chris Jackson s’est entretenu avec Ossi Niemimuukko, directeur général de RHK et Henri Kuitunen, pdg du groupe VR à propos de l’augmentation du niveau des investissements depuis la restructuration et a examiné les possibles implications résultant de l’introduction d’une concurrence accrue
Open Access bedroht profitabel Harmonie
Vier Jahre nach der Abtrennung der finnischen Bahninfrastruktur-Beh