The Russia Journal

Reform of Russia’s rail network is going in unexpected directions.

The reform of Russia’s railway system is off-track, with initial work running behind schedule. At least that’s the view of the auditing watchdog, the Russian Audit Chamber.

Measures that were supposed to be a part of the first stage of reform have not been implemented on time, the chamber said after a series of inspections. And while four new laws came into force in April, real action has not begun because the regulations only set out the outlines for reform, while actual procedures for implementing it are yet to be drawn up, the chamber said.

Most of the laws passed in regard to reform came with half-year delays, the chamber added. The last of the needed laws – one on railway asset management and disposal – was finally signed by President Vladimir Putin in early March.

That has hopes rising that something will finally be achieved. The law paves the way for the establishment of the Russian Railways Co. and the privatization of the Railways Ministry and its rolling stock.

In the first stage of reform, the new company will take control of the entire rail-transport infrastructure, locomotives and some of the fleet of carriages. The company will take over most of what now belongs to the Railways Ministry (89 million pieces of fixed capital and 890 million other assets) and 200,000 hectares of land. The remaining 1.1 million hectares of land under railway lines and stations will remain federal property.

Analysts say the new company’s charter capital will be higher than that of state energy-grid monopoly RAO Unified Energy Systems (UES) and natural-gas monopoly Gazprom combined.

During the second stage of reform, new companies will be formed from the main company to deal specifically with suburban passenger travel, long-distance passenger travel, repair services and production of spare parts, transit services, refrigeration transport and other elements.

Analysts say the new company’s charter capital will be higher than that of state energy-grid monopoly RAO UES and natural-gas monopoly Gazprom put together.

But a report by the Audit Chamber cited several shortcomings in the new laws drafted by the Railways Ministry, saying that those pertaining to dividing state regulatory functions and economic management "require further work." It added that that there was the risk of losing control over the sector at the division-of-functions stage.

The government still has to make decisions on dividing regulating and economic functions and handing over authority to the Russian Railways Co. Discussions are going on as to who will represent the state in regulating rail services. The two possibilities being looked at involve either leaving regulatory functions with the Railways Ministry, or having the Transport Ministry take over what will be left of it and forming a single ministry to cover all transport.

The government looks to be favoring the second option. At the beginning of April, Finance Minister Alexei Kudrin said that the Railways Ministry would be broken up, with what remains of it being handed to the Transport Ministry.

"Part of the [Railway] Ministry’s functions will be taken over by the Transport Ministry, and part by the Russian Railways Co.," Kudrin said. "This will happen over the course of a year. Much will depend on how much time railway-transport reform takes."

But the lack of transparency in the Railways Ministry and the complicated tangle of its financial and economic affairs make implementing reform difficult. There are still no exact data on the ministry’s assets.

"The inventory of the federal rail-transport assets and liabilities carried out as of December 2001 did not meet the objective set by the first stage of the rail transport structural reform program, as it does not reflect the real value of these assets," the Audit Chamber report said. "The technical state of the assets was not evaluated and the data from the inventory cannot be used to draw up the documents required for the creation of the Russian Railways Co."

Without more precise data on assets, the handover process cannot begin. Analysts also say that under current conditions, there is no way that railway privatization can be carried out successfully.

"It will be hard to attract investors to a company with assets in the state the railways and other Railways Ministry assets are in," said Alexei Zaitsev, an analyst at a local investment bank, Prospekt. "Theoretically, it’s possible, but the price the investor could propose would definitely not suit the Railways Ministry. Getting a decent price would first require reforming the management structure, which is absolutely not transparent at the moment, and also reforming the current assets, and only then could privatization begin."

Apart from these problems, there is also a whole series of issues to resolve concerning relations with private transporters. In its current draft, the law gives the Russian Railways Co. the chance to put pressure on other transporters, for example, by using the fact that the infrastructure (allocation of slots in train schedules, use of loading facilities, etc.) is in its hands.

The new laws set out no criteria for what constitutes these kinds of technical advantages, making it practically impossible to prove they are there. Lack of clarity means that disputes will be common, drag on in courts for years and send many a freight company into the red.

The new laws also make it possible to refuse to let a freight delivery proceed up to three days before it is due to begin. In practice, this means that a private operator cannot be sure until almost the last minute that the freight will leave on time. A situation could arise in which, say, Eastern Siberian Railways would send the cargo, but, at the next leg of the journey, Far East Railways would then say it does not have the facilities available to handle the freight.

In other words, the monopoly principle will continue, only at a regional instead of federal level, and with Moscow no longer able to control the situation. Industry insiders fear that reform will create regional and private operators with little coordination on logistics.

In the end, neither the interests of the companies sending freight, off whose money the railways live, nor of the private freight transporters, who were promised that reform would bring competition, have been taken into account.

"Reducing the share of transport expenses in the cost-price of transported freight is not even mentioned in these documents, but this is the fundamental criteria for measuring the reform’s results," said Alexei Khoruzhy, vice president of the International Union of Metallurgists. It looks, then, that freight tariffs will not come down. "The Duma has approved a completely absurd amendment saying that tariffs are formed on a cost-price basis that will ensure non-loss-making operation of rail transport. In this situation, there can’t be any talk of bringing down tariffs."

A sum of 6 billion rubles has been allocated just for registering the Russian Railways Co., and reorganizing the Railways Ministry will cost just as much. The state has refused to come up with this money, and this means it will instead be included in the cost-price of rail services and push tariffs up.

The Railways Ministry, meanwhile, still has debts of 160 billion rubles (unofficially, some say it is really as much as 400 billion rubles). Then there are the expenses of freight companies and operators. The result is that Russia will get another large monopoly that will cost vast sums of money to create and bring only increased tariffs and problems on the railways. But, given the snail’s pace of railways reform so far, even this will not happen soon.