November 19, 2014

A lifeline for Russia’s ailing suburban services?

Written by  Vladimir Savchuk
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Russian suburban services are struggling to achieve what was hoped when the railway market was reformed in Russia in 2001. Vladimir Savchuk, deputy director general of Russia's Institute of Natural Monopolies Research (IPEM), considers what is holding these suburban operations back and explains how a new round of regulatory changes could halt their decline.

WITHOUT adequate financing, and with regional government policies often favouring road over rail, Russia's suburban services are currently at a crossroads. While infrastructure developments to support major events are boosting operations in some regions, many others are suffering as services and ageing rolling stock are withdrawn and not replaced.

It all looked a lot brighter 13 years ago, when reforms were enacted which prompted the opening of the market and the establishment of local suburban rail operators in regions across the world's largest country.

Following a development process which commenced in 2001 and concluded in 2010, Russia's modern suburban passenger market was officially established in 2011. The 10-year interim period was defined by several major changes with the most significant being the passing of responsibility for suburban services to regional authorities.

Until 2011 Russian suburban passenger services were provided by the 17 railway divisions of the Russian Ministry of Communication (MPS) which was reformed as Russian Railways (RZD) in 2003. These divisions managed not only suburban transport but freight and long-distance services, as well as stations, depots and power stations, and houses, schools and hospitals for railway workers.

Cross-subsidies from profitable freight services were the primary source of funding for these services, meaning that freight tariffs partly covered passenger transport expenses. As a result the cost of shipping goods by rail increased substantially, which damaged competiveness and led to increases in inflation.

RussSuburbanCross-subsidies were eliminated following the reforms to the Russian rail sector which also led to the establishment of various RZD passenger subsidiaries. There are currently 27 companies working in the Russian suburban market, including Aeroexpress, which provides direct links from the centre of several Russian cities to their airports. Aeroexpress is the only suburban operator which is not listed on the unified register of national monopolies. This list consists of service providers that offer, in agreement with local regions, socially-important transport for distances of up to 200km from the main railway station in 73 Russian regions.

Under the structure regional authorities are responsible for setting the final fare for passengers and the level of service. They also have an obligation to compensate the suburban company if they experience any shortfall in income, which is generally caused by instituting tariffs that are not economically feasible. While RZD does not provide suburban transport services, it is responsible for managing and maintaining infrastructure, employing train crews, and also owns the rolling stock, which it leases to the suburban companies. In addition RZD receives a Roubles 25.02bn ($US 62.7m) subsidy from the state to compensate it for offering a reduced 1% rate for infrastructure services to suburban railway companies.

Weakness

This structure's primary weakness is that it breeds an environment of unprofitability. Currently 25 of the 26 suburban passenger operators on the register are unprofitable, primarily due to the failure of ticket sales income to cover expenditure and insufficient compensation from state authorities. Annual compensation levels fall below the necessary volume of 40-48%.

Operators are also hindered by their lack of power to penalise fare evasion. Indeed Russia's administrative code does not include the name of any regulatory body that is authorised to perform these functions. The only body that is recognised is the transport police, which does not count reprimanding ticketless passengers as among its responsibilities. As a result it is impossible to set a penalty for fare evasion, and ticketless passengers, known as "hares," cost Russia's suburban operators Roubles 3-4bn in lost revenue.

The poor financial condition of suburban operators means they are unable to meet RZD's infrastructure and rolling stock and crew leasing costs, despite paying the reduced rate of 1%. This was planned as a temporary measure, but with suburban companies struggling to meet the fees, following long and difficult negotiations, in March the Russian government agreed to retain the annual subsidy of Roubles 25.02bn for the next 15 years.

However, this has not solved the problem. Many suburban companies also cannot realistically meet the costs of leasing RZD rolling stock and crew, which RZD estimates will increase to Roubles 29.34bn by the end of 2014. As a result, the modern cross-subsidised structure of suburban passenger operations that has emerged contradicts the principles set out during the reform process.

The status of suburban rail operations is also undermined by regional suburban transport policies which favour road. Indeed many state authorities have sought to replace suburban services with buses, which has led to the procurement of more buses, and more money from state budgets going towards road maintenance and repairs.

Services in Moscow and the Moscow region, which are operated by Central Suburban Passenger Company (CPPK) and Moscow-Tver Suburban Passenger Company (MT PPK), are the only two services in the 73 Russian regions, not currently experiencing a decline in ridership. Around 150 regional services were withdrawn in both 2012 and 2013, and over 300 services face the chop this year. Patronage is inevitably falling as a result. And in a bid to compensate for the shortall, fares are increasing, which is actually forcing many remaining passengers to seek less costly travel options.

Another problem is the current condition of rolling stock used to operate these services. Ageing and under-maintained coaches, DMUs and EMUs are gradually being withdrawn from service and not being replaced. Many suburban operators are also unable to meet the costs of maintaining their existing leased fleets, and if current trends are maintained RZD will have just over 10,000 suitable multiple-unit cars and coaches available to lease in 2020.

In the long-term reduced purchases of new passenger rolling stock is expected, with procurements limited to demand from CPPK as it is currently the only suburban company able to buy its own rolling stock. In 2013 CPPK purchased four ED4M EMUs from Transmashholding subsidiary Demikhovo Machinebuilding Plant, and it plans to purchase 26 EMUs in 2014. As a result Russian rolling stock manufacturers should anticipate a fall in their output.

Moscow dominates

The fact that CPPK and MT PPK are the only operators in a reasonable financial position is no coincidence. Moscow and the greater Moscow region currently dominate rail-related investments in Russia, with two large suburban rail infrastructure projects currently underway.

The first is a Roubles 533.73bn project to construct 10 lines totalling 226km linking Moscow with the surrounding region. The second project involves reconstructing the 54km Moscow Circle Railway, which includes building and reconstructing traction substations, structures, and establishing 31 interchange stations with the Moscow metro, while introducing a 5-10 minute interval service. The work is set to be completed in 2015.

New EMUs are also being deployed in the city, with Demikhovo supplying 26 ED4M EMUs to CPPK following a contract awarded in March, while 26 ED9E EMUs were delivered in April 2013.

Unfortunately developments in Moscow are in stark contrast with other areas of Russia. The poor financial condition of regional suburban passenger operators means that they are reliant on big infrastructure projects implemented in response to the needs of major events to boost services.

Vladivostok, Kazan and Sochi have all benefited in recent years, and with 11 cities across Russia set to host Fifa World Cup matches in 2018, it is reasonable to expect that updates of suburban and intermodal infrastructure will take place in the run up to the tournament. This could include the purchase of new more efficient rolling stock, although no definite plans have yet been announced.

However, these success stories are clearly few and far between and the majority of suburban operations are still facing huge financial challenges. As a result on May 19 the Russian government agreed to a new concept for suburban passenger rail services. According to this document the state authorities are obliged to sign long-term agreements with suburban passenger operators. This agreement includes estimations of passenger flow, train schedules, requirements for fare calculation and compensation from regional budgets, mirroring the approach taken in many European Union countries.

This is an important step in that while the strategy must be coordinated with the federal government and include the parameters of railway, bus and other transport services, it passes complete responsibility for suburban operations to regional authorities. At the same time it provides regional authorities with the power to refuse the withdrawal of suburban rail services in favour of alternative modes of transport. In addition through the establishment of 15-year operating agreements, and increased transparency in negotiations between authorities and operators, it is hoped that it will be possible for operators to establish long-term plans which will provide stable demand for rolling stock and infrastructure development.

The regulations also stipulate that in addition to RZD, operators, regional authorities, rolling stock producers, and leasing companies can own rolling stock. However, it is up to the regional authority to specify the precise investments in new rolling stock from funds allocated to the regional tariff.

Another regulatory amendment made this year is a change in the rules for rail passenger and baggage transport, which addresses the problem of ticketless passengers. The rules state that any passenger without a ticket who is identified by the controller during a trip must either pay for the ticket as well as a penalty fee if they continue on the trip, or pay the fare and leave the train. If they refuse to pay for the ticket, the operator's employees can assist with removing the passenger from the train at the next station.

However, it must be noted that at present many passengers are unable to buy tickets because not every station has ticket sales desks or ticket printing machines. Many stations do not have ticket barriers which can automatically check the validity of a ticket. As a result RZD, as the owner of the railway infrastructure, has committed to gradually fit stations with this equipment.

Certainly as it stands the existing model is not sustainable and is not achieving what was hoped when the market was deregulated over a decade ago. While it is too early to say whether these regulatory changes will be a success, it is hoped they are a step towards securing the long-term future of Russian suburban operations.

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