Economic surge fuels Russian rail revival

Completion in 2010 of the world’s biggest railway restructuring project - the reform of Russian Railways - will pave the way for a massive investment programme designed to modernise the network, reports David Briginshaw from Moscow.

RUSSIA’s rapidly-increasing economic strength, thanks to the exploitation of its huge, gas, oil and mineral reserves, is going hand-in-hand with the development of its most important mode of transport: the railway. The country’s vast distances, and huge volumes of freight and passengers all favour rail, while the road network is relatively poorly developed.

Russia’s burgeoning wealth, the increasing profitability of Russian Railways (RZD), and the gradual influx of private capital are combining to fund a huge railway development programme. A massive Roubles 9 trillion ($US 381 billion) will be invested between 2010 and 2015. RZD will fund Roubles 5 trillion of this, while the government and the private sector will each contribute Roubles 2 trillion.

Russia is levying $US 1 on each barrel of oil produced to help fund all types of infrastructure projects, and the fund is currently worth Roubles 1.5 trillion. Projects have to compete for funding, and so far three rail projects have won funding worth Roubles 250 billion.

Half of the Roubles 9 trillion investment programme will be used to upgrade the existing network, Roubles 3 trillion will be spent on motive power and rolling stock, and Roubles 1.5 trillion will be used to build new lines.

Investment on this scale would not be possible without the hugely ambitious but vital task of railway reform. With a network of 86,660km, RZD runs the world’s largest unified railway. Railfreight carried by RZD and the increasing number of private operators accounts for 93% of Russia’s freight (excluding commodities transported by pipeline). RZD also carries 60% of domestic passenger traffic. As Mr Igor Levitin, Russia’s transport minister, puts it: “Russian railways are the backbone and blood vessels of Russia, so we can’t afford to make any mistakes.”

Levitin is confident that the reform process, which started in 2001, will be completed on schedule by 2010. The first step was to separate the railway from the former Ministry of Railways and set up RZD as a state-owned company. This was achieved in 2003.

The second phase from 2003 to 2005 involved a gradual restructuring of RZD to prepare for partial privatisation and a separation of infrastructure from operations. This phase also saw the creation of the Federal Agency for Rail Transport (FAZT) which is responsible for authorising the construction of new lines, certification of rolling stock, and resolving disputes. The third phase entails the gradual privatisation of key elements of RZD.

“The priorities of reform are to develop competition, increase competitiveness, boost investment, and to split maintenance and support functions,” says Levitin. “We are now in stage three, which is achieving competitiveness by ending the monopoly of RZD.”

Levitin is quick to point out that railway reform is not set in stone. “We have the opportunity to stop and take stock of the reform process every so often and to make changes if we are not happy with the way things are going, unlike the British experience.”

Similarly, a step-by-step approach is being taken to the sale of RZD subsidiaries. A 15% stake in TransContainer has been sold so far. “We didn’t want to sell more than 15% because we think these companies are undervalued at present, so we will wait until their value rises before we sell more shares.” The next tranche of shares will probably be sold this year.

RZD has already set up its so-called First Freight Company, which accounts for around half of its railfreight business. The privatisation of First Freight Company is expected to start next year with an initial public offering (IPO). The rest of RZD’s freight business, apart from some specialised subsidiaries such as TransContainer, a refrigerated freight company, and Rail Trans Auto, which transports new cars, will make up the Second Freight Company which is scheduled for privatisation in 2010.

“We are clear about freight, which is the priority, but we also need to reform passenger rail transport,” says Levitin. Federal subsidies for unprofitable passenger services are gradually being phased in, and all losses will be covered by next year.

	ER-200, Russia’s high-speed train, prepares to leave St Petersburg for Moscow. RZD will introduce Siemens Velaro trains on this route next year.

At present long-distance trains have four classes of accommodation. RZD is free to fix the fares for first and second class accommodation which is profitable. Fares in third and fourth class are regulated and make a loss, but each train must have some third and fourth-class coaches, although the proportion is up to RZD. “The idea of the subsidy is to cover the loss per train of the third and fourth class accommodation once the profit from the third and fourth class has been taken into account,” says Mr Alan Valerevich Lushnikov, acting head of FAZT. The government will pay around Roubles 16.5 billion this year in subsidies, but this will rise to Roubles 30 billion next year.

A key point about the passenger subsidies is that they can be paid to both RZD and private operators. “After we move to a fully-fledged subsidised passenger operation, we expect to see a market for private passenger companies, and expect the same explosive growth as we have seen in freight,” says Levitin. “We think about 30% of all rail passengers will eventually be carried by private operators.” Open-access passenger operation is already allowed and there are a few privately-operated services from Moscow to St Petersburg and Nizhny Novgorod. However, the privatisation of RZD’s long-distance passenger business is not foreseen until after 2015.

A major hindrance to the development of private long-distance passenger services is the low line speeds throughout most of the network. However, this should improve with line upgrading and RZD’s plans to introduce high-speed services. The first step will be the introduction of Siemens Velaro trains next year on the Moscow - St Petersburg and Moscow - Nizhni Novgorod routes, but new 350km/h lines will be built along these two corridors. The St Petersburg - Finnish border line is being upgraded for the introduction of Alstom Pendolino trains to Helsinki, while a separate freight line will be built to segregate freight and passenger services. The 1767km Moscow - Rostov - Sochi - Adler line will be upgraded for 200km/h operation which will cut the journey time from 25h today to 14h.

Suburban rail services are also being reformed, and will be fully subsidised but through regional governments rather than from federal funds. “We already have two private suburban operators,” says Levitin. “Their customers are the regional governments who are shareholders together with RZD. When we have 100% subsidies for suburban rail services, these will be sold to private companies.” The annual bill for subsidising suburban rail services will also be Roubles 30 billion.

The law currently forbids the sale of shares in RZD as owner of the infrastructure. “The infrastructure is of very high importance to Russia, so we are not planning any changes to this situation,” says Levitin. However, Russia is encouraging the private sector to invest in the construction of new lines through concessions. “Three large projects - all new railways to serve mines - are being implemented through concessions, and one of them involves a mixture of foreign and domestic companies. “The concessions are for a limited period, sufficient for the investor to get its money back, and then the new lines will revert to the government,” Levitin explains.

Lushnikov expects about 1000km out of a total of 8000km of new lines to be funded through concessions. “About 1000km is the minimum we hope for, but it could be more if we can find investors,” he says.

So far, seven new-line construction projects have been approved and another four are being assessed. Funding is already in place, split 50:50 between the government and a private investor, for a Roubles 89 billion project to build a 459km line from Kyzyl to Kuragino in the Altay mountains near the Mongolian border. The line will serve rich mineral deposits in the area and should generate 15 million tonnes of freight a year. “The line will be similar to China’s Tibet Railway as it will average 2000m above sea level, so it will be difficult to build,” says Lushnikov. Design work will start this year and it is hoped to open the line in 2012.

Another major project is a 1500km line from Polunochnaya via Obskaya to Nadym. “The line will enable us to extract and carry 30 million tonnes of minerals a year,” says Lushnikov. It is hoped to start work on the five-year project in 2010.

There is a long-term plan up to 2030 which includes some major projects. One is a 3000km western extension of the Baykal Amur Magistral (BAM), built in the Soviet era. Another is a line from Yakutsk, which itself will finally be connected to the network in 2010, to the Far Eastern port of Magadan. “This is a most exciting project because of the huge natural resources it would allow us to exploit, but it will also be a very difficult railway to build and operate because of the severe climate,” says Lushnikov. However, the Russians have never been ones to shy away from seemingly impossible challenges.