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Investment will underpin RZD reforms

01 Jan 2007

The third phase of Russia's railway reform process is due to see the introduction of competition by 2010, and will require the separation of infrastructure management from train operations. Chris Jackson asked Russian Railways President Vladimir Yakunin to explain how RZD is changing, and how it will fund much-needed investment to modernise infrastructure and rolling stock

Jackson: Could you please explain RZD's long-term plans and the progress you have made in implementing the government's railway reforms? What deadlines do you have for the next stage of the programme?

Yakunin: The first step of the railway reform process came on October 1 2003, when OAO RZD was established as a government-owned joint stock company. As part of this change, the company introduced corporate management practices to guarantee financial transparency. A fundamental achievement was the introduction of a new legal framework to promote competition in rail transport and to prevent discrimination in providing independent operators with access to the rail infrastructure.

The third phase of reform began in 2006 and will run until 2010. The principal goal for this phase is to attract investment and encourage large-scale expansion of rail transport.

RZD has three strategic goals for this period. Firstly, we will develop a competitive market for transport services in co-operation with the Ministry of Transport. Secondly, we will work to increase the overall competitiveness of RZD, which means becoming much more efficient. And thirdly, RZD must increase its capitalisation while remaining under close government control.

We are going to start by separating those sectors of the business that would benefit from a competitive market from those where there is a natural monopoly. This will involve splitting infrastructure from operations. The government will retain 100% ownership of the infrastructure, with RZD providing management and maintenance services.

We have already started to establish separate train operating companies. In particular, we plan to separate long-distance freight and passenger transport by establishing a freight company affiliated with RZD and a federal passenger transport company.

We expect the third stage of reform to lead to steady improvements in the state-owned infrastructure and to make RZD more profitable through the development of train operating activities. We intend to attract private capital by selling shares in affiliated companies, which we will establish in market sectors open to competition. As well as improving the transport services on offer, this will allow us to fund a dramatic modernisation of both infrastructure and rolling stock.

The changes will allow the RZD holding company to enhance its presence in highly-profitable market segments, use its rolling stock more effectively, and promote innovation in services and technology. The corporate freight carriers will increase their profitability and capitalisation. RZD expects its affiliates to earn total profits of roughly US$3bn over the five years, reaching an annual Ebitda of US$1bn.

Jackson: Private companies were given the right to buy and operate freight wagons independently several years ago. How do these companies use RZD tracks, and what are the regulations for encouraging competition?

Yakunin: Independent private companies can use their own rolling stock, including locomotives. The fees they pay to use our infrastructure are set out in a schedule of standard tariffs. If a company has its own rolling stock, it does not pay RZD the vehicle hire component of the basic freight tariff, so this potentially allows them to offer their customers lower fees.

In this respect the private companies are in a better position than RZD. They are quicker to respond to market changes, and so win more customers. We have standard tariffs set by the government that cannot be adjusted quickly, which rules out a timely response to changes in market demand.

Jackson: How much freight and passenger traffic is RZD carrying on its principal routes, and what are your expectations for the next few years?

Yakunin: RZD carried more than 1 billion tonnes of freight between January and October 2006 (table). This is 3·1% more than in the same period in 2005. Total freight traffic on the Russian rail network is forecast to reach 1·3 or 1·4 billion tonnes a year by 2008.

As for passenger traffic, more than 1·15 billion journeys were recorded between January and October, which was 2·7% up on the same period in 2005. Of these, the long-distance business accounted for 112 million journeys compared with 1·03 billion commuter trips.

Jackson: You mentioned that RZD's top priority is modernising infrastructure. How much do you plan to spend on modernisation within the next five years? How will this be funded? Could you please give some examples of projects planned for the near future?

Yakunin: We have so many infrastructure projects in progress or planned that I couldn't describe them all.

For example, RZD's 2007-10 investment programme envisages the development of routes linking the Kuznetsk coal basin with the Far East, the Azov Sea and Black Sea, and with transport hubs in the northwest. This is priced at roughly 120bn roubles. The objective is to eliminate bottlenecks, which will improve customer service in terms of regular reliable deliveries and reduced waiting times, and allow us to use rolling stock more efficiently.

Another essential project is to finish the construction of the Berkakit - Tommot - Kerdem (Yakutsk) line by 2010, in line with the government decree of May 15 2004. We have allocated approximately 3bn roubles for this work in our 2006-08 budget.

In the northwest, we are working on the complete reconstruction of the Mga-Gatchina - Veimarn - Ivangorod line and the rail approaches to ports along the south coast of the Gulf of Finland. This is budgeted at 26·2bn roubles in 2006-10. The line carries considerable traffic to and from Estonia, and is very important to the region. When the port facilities have been completed in Luzhskaya Guba, more freight will move to the port of Ust-Luga via Veimarn - Kotly-Luzhskaya.

A ferry route connecting Ust-Luga with Baltiisk was inaugurated in September (RG 11.06 p720), capable of transporting up to 1·5 million tonnes of freight each year. The principal commodities are petroleum products, coal, minerals, construction materials and timber, which are vital to the Kaliningrad region. The Ust-Luga - Baltiisk - Sassnitz ferry route is a major achievement. It promotes the integration of the Russian transport network and strengthens its position on the world market, especially in its links to the European Union countries.

RZD intends to spend at least 4bn roubles this year improving the rail approaches to Ust-Luga, more than 6bn in 2008, and another 2bn in 2009. We believe that the current situation demands more extensive development of both local and long-distance routes to the port. This work is being is financed from the federal investment fund, and we hope to attract private investment.

Completion of the new port at Ust-Luga will give freight companies a shorter and cheaper route than using the current facilities in the former Soviet Baltic states. As well as diverting some of the freight using ports in Estonia, Latvia and Lithuania, we it expect to permit a substantial increase in Russia's foreign trade, which is currently restricted by the lack of viable routes.

Jackson: RZD is an active partner with the Yakutsk Railway Co, which is building new lines in Siberia. Is RZD involved with independent railway projects elsewhere in Russia?

Yakunin: We are discussing the possibility of joining independent railway projects, for instance the construction of the Naryn - Lugokan line in the Chita region. RZD is willing both to provide locos and rolling stock for the construction phase and to operate freight services on the finished line.

The southeast of the Chita region is fabulously rich in minerals and other raw materials. Norilsk Nickel has plans to develop ore-processing plants there. But the cost of exploration alone is estimated at over 140bn roubles.

RZD has also become involved in the construction of the 44 km Karabula - Yarki branch, for which the Russian Investment Fund has allocated 5·1bn roubles. A design competition for the project was due to be lauched before the end of 2006. RZD might also take part in building the infrastructure for the connecting Reshoty - Karabula line.

Jackson: RZD has been invited to take part in development of a Moscow - St Petersburg high speed line. What part are you playing in this project, and how does it relate to your order for Velaro RUS high speed trains from Siemens?

Yakunin: Establishing high speed railways in Russia is a long-term project that is still under discussion. At present Russia does not have the infrastructure necessary for passenger operation at 300 to 350 km/h. Our mixed-traffic routes cannot cope with very fast trains.

The development of high speed services on the Moscow - St Petersburg and St Petersburg - Helsinki routes is certainly one of our big investment priorities. RZD has already started work to adapt the existing Moscow - St Petersburg line to higher speeds, but currently, we can only run at up to 250 km/h.

Nevertheless we set a new national record in August, when a train travelled from Moscow to St Petersburg in 3 h 55 min, at an average of 170 km/h. In the longer term, we envisage a 3 h journey time from Moscow to St Petersburg, running at 200 to 250 km/h.

But this upgrading is expensive - cutting journey times by 1 min required expenditure of about 600m roubles on the infrastructure. In total it cost 2·3bn roubles to change the ER200 schedule, and we are planning to spend 3·5bn roubles in 2007 to increase further the speeds on this route.

Another problem at present is the absence of true high speed rolling stock, but the first Velaro RUS sets will arrive in 2008 (RG 11.06 p717). These 250 m long 10-car trains, with seats for 600 people, are designed to operate at up to 330 km/h. They will allow RZD to establish Russia's first high speed service between Moscow and St Petersburg.

Jackson: Another priority you have mentioned is the replacement or refurbishment of locomotives and rolling stock. RZD has signed a framework contract with Transmash Holding to supply new locos over a five-year period. What are your plans for new passenger coaches and freight wagons, and how much has been allocated for this?

Yakunin: Updating rolling stock is certainly one of RZD's priorities, and we plan to earmark 175bn roubles for this in 2007-10. But the budget allocation for rolling stock is not sufficient for timely modernisation nor for handling the traffic volumes envisaged in RZD's long-term plan for 2010-15.

To meet the target for 2010, RZD needs to buy at least 20 000 new vehicles a year, including 15 000 to 18 000 open wagons. If we establish and partly float a new freight operating company, as we are planning to do, this should generate enough finance to buy the number of wagons envisaged.

Suburban routes, like long-distance passenger trains, are primarily provided for social reasons, rather than to make a profit. RZD operates them at a loss, so we need government support to update the passenger rolling stock fleet.

Acquiring new rolling stock is proving difficult, but we have already bought some Russian-made equipment. That is what matters most. After the collapse of the USSR, the only plants manufacturing DC electric freight locos and main line diesel locos were located outside Russia, as were the suppliers of various components - mainly electrical equipment. That is why Russia presently does not build certain types of loco.

In spite of all this, new products are appearing. Bryansk Engineering Plant has built its first Vityaz diesel locomotive with asynchronous AC traction motors. Using many pioneering technologies, these locomotives will be able to satisfy RZD's demands for the next 20 years.

Early last year Kolomensky Zavod introduced the EP2K electric locomotive for passenger service. This is now undergoing static tests, and we envisage buying a series build in 2007-09 that will replace Czech-manufactured CS-2 locos which date from the mid-1960s.

Six EP10 electric locos are already in use on the Moscow - Minsk and Moscow - Kazan routes, and we expected to have 12 in service by the end of 2006.

RZD has invited Russian manufacturers to design a new electric locomotive, provisionally designated EP20. We will need at least 230 of this design by 2008. We do not think it would be a good idea to import locomotives, though we intend to use foreign technology as well as the fruits of RZD's own research and development projects. Transmash Holding, which will be involved in the project, is due to call tenders shortly for an international partner to form a joint venture to build the EP20s.

Jackson: RZD has established several joint ventures to run suburban services around different cities. How are they coming along? Does the reform programme envisage separating those joint ventures from RZD? And what changes lie in store for passenger services that are not run by suburban operators or the federal long-distance company?

Yakunin: We are working with many regional governments on joint ventures to manage suburban passenger services. Some companies already exist, others are being established. They are run either as RZD business units or as joint stock affiliates with regional or municipal government participation.

There are typically three steps in establishing a suburban business. During the first stage, the company functions solely as a passenger carrier for a particular area. RZD will provide the company with rolling stock, stations and platforms for these activities.

The business can then start acquiring property. The shareholders may decide to increase the authorised capital through an extra share issue, or by the existing partners paying for shares with assets. For instance, a regional or municipal government could contribute new electric trainsets to fund its stake.

At the third stage, the suburban company would add the shareholders' assets to its authorised corporate capital. At this stage it would be able to start buying assets with its own resources, or by attracting capital investors. Corporate commercial investors could buy into the company if the stakeholders agree.

Eleven regional governments have now joined with RZD to establish suburban transport companies. We intend to establish another 32 such companies, involving 44 regional governments in total. We hope this will enable the rapid replacement of outdated and worn-out rolling stock, especially the suburban EMU fleet, and improve services.

It is very expensive to buy new rolling stock, and there is no way that we can replace all the electric trains in Russia at once. The car industry provides a good comparison. The minimum cost of test sample design and manufacturing exceeds US$3m, but this investment is typically recouped within five to seven years. An RA-1 railbus costs 28·7m roubles, or more than US$1m, and R&D for a new-generation locomotive-hauled passenger carriage requires a similar amount.

Russian President Vladimir Putin had some strong words to say about passenger services last year: 'it is unacceptable to shift the financial burden onto passengers' shoulders when building up a passenger transport company. Railways account for approximately 40% of the entire Russian passenger transport sector, so all aspects of their reorganisation must involve the smallest possible risk.'

The federal budget for 2007 earmarked 10·9bn roubles to cover the losses sustained by passenger services. That is certainly not enough, but the fact that we have an allocation at all is a spectacular achievement. The problem of insufficient subsidies for passenger operations must be solved by 2009. I want to stress that the federal government is supporting the Russian public, not RZD, by keeping railway travel affordable while making it more comfortable.

Jackson: Looking further afield, RZD has signed joint-venture contracts with other railways and cargo carriers in the Far East and Europe what are your long-term plans for the international market?

Yakunin: We are very interested in gaining a foothold in both the international transport and infrastructure markets.

One of our long-standing goals is to develop transit business via the Trans-Siberian Railway. We are expanding the movement of container traffic between the Asia-Pacific region and European countries such as Finland, Poland and Germany via the port of Vostochny and the border stations at Zabaikalsk and Naushki. Perhaps the most significant cross-border container project at present involves the movement of automotive components from South Korea via Nakhodka to the Taganrog Automobile Plant in the Caucasus where Hyundai cars are assembled.

Meanwhile, RZD and Belarus Railways are implementing an agreement signed in August 2005 on electronic information exchange. We decided to draw on our experience with container trains such as the Mongolian Vector and the East Wind to begin experimenting with electronic data exchange. Efforts are also being made to introduce electronic waybill exchanges along the European International Corridor 2 from Moscow to Berlin.

As for infrastructure projects, RZD is bidding for work on the construction of the US$2bn north-south railway in Saudi Arabia. We are also ready to take part in expansion of the rail infrastructure in Algeria, where more than US$5bn is to be allocated to develop the network from its current 4 000 km length.

Together with the railways of Azerbaijan and Iran, RZD is already involved in the construction of the Qazvin - Resht - Astara line, which forms part of the emerging North-South Corridor linking the Baltic Sea with the Persian Gulf. The potential transit traffic on this route is estimated at 40 million tonnes a year.

The Qazvin - Resht - Astara line is a positive example of international railway co-operation. It will halve the current distance from Europe to India via the Suez Canal. We believe that linking the North-South corridor with European Corridor 2 would create an effective multi-modal transport route between Europe, the Gulf states and India.

  • CAPTION: Tracklaying in progress on the Bekasovo 1 - Nara line. RZD has plans to upgrade the infrastructure on many of its principal routes
  • CAPTION: A Kuibyshev Railway service arrrives at Samara. RZD insists that the federal government is responsible for ensuring the affordability of passenger services
  • CAPTION: RZD has ambitions to become an international player involved in both infrastructure projects and freight operations, according to its President Vladimir Yakunin
  • CAPTION: Loading coal and fuel oil destined for the Kaliningrad region onto the Baltiisk train ferry at the new terminal at the port of Ust-Luga
  • CAPTION: New-generation Sputnik EMUs are used on the express suburban service between Moscow's Kievsky station and Vnukovo Airport
  • CAPTION: A mock-up of the Siemens Velaro RUS driving car at an RZD exhibition in St Petersburg. RZD has been invited to participate in the development of a high speed line to the city from Moscow
  • CAPTION: Known as 'Trans-Russia', the 2ES4K is the first 3 kV DC electric freight loco to be manufactured in Russia for 20 years the prototype was officially unveiled at Novocherkassk in November
  • CAPTION: RZD hopes that the creation of joint venture companies will facilitate investment to renew the suburban EMU fleets in many cities

Les investissements étayent les réformes des RZD

Tandis que la Russie entre dans la troisième phase de son processus de réforme de son réseau ferré, qui conduira à l'introduction de la concurrence pour 2010, les Chemins de fer russes travaillent à l'amélioration de leur efficacité et de leur compétitivité. Vladimir Yakunin, président des RZD, explique à Chris Jackson que cela nécessitera la séparation entre la gestion de l'infrastructure et l'exploitation, à la suite de la création récente de nouvelles unités d'affaires pour exploiter les services voyageurs et fret à longue distance. Les RZD entendent lever des capitaux au moyen de la vente de parts de leurs filiales, ce qui aidera à financer un important programme d'investissements afin de moderniser à la fois l'infrastructure et le matériel roulant

Investitionen stützen Reformen bei RZD

Wie Russland in die dritte Phase seines Bahnreformprozesses eintritt, welche die Einführung von Konkurrenz in 2010 sieht, arbeiten die Russischen Bahnen daran, ihre Effizienz und Wettbewerbsposition zu verbessern. Der Präsident der RZD, Vladimir Yakunin, erklärt Chris Jackson, dass dies die Trennung von Infrastruktur und Betrieb bedeutet, in Folge der kürzlich erfolgten Schaffung von neuen Geschäftsbereichen für Langstrecken-Reiseverkehr und Güterverkehr. RZD plant den Verkauf von Aktien von ihren Tochtergesellschaften, welcher ein grosses Investitionsprogramm zur Modernisierung von Infrastruktur und Rollmaterial finanziert

La inversión respaldará las reformas de RZD

Con la entrada en la tercera fase del proceso de reforma ferroviaria de Rusia, que verá la introducción de la competencia en 2010, los ferrocarriles rusos trabajan para mejorar su eficiencia y competitividad. Vladimir Yakunin, presidente de RZD, le comenta a Chris Jackson que esto requerirá separar la gestión en cuanto a infraestructuras de las operaciones ferroviarias, después de la creación de nuevas unidades de negocio para servicios de cargas y de pasajeros de larga distancia. RZD pretende aumentar el capital mediante la venta de acciones de sus empresas filiales, lo que ayudará a crear un importante programa de inversión para modernizar tanto la infraestructura como el material móvil