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Accounts Chamber of the Russian Federation: Russia is lagging on railway sector reform

Russia is lagging on railway sector reform, 50% of the measures are implemented with a 3 year delay. These are the results of the “Analysis of the structural reform of rail transport and its impact on the economy and social sphere in Russia”, made by the Accounts Chamber of the Russian Federation (ACR) and published on Monday. Tatiana Golikova, Chairwoman of ACR, stated in an interview for the local press:  “So, by the end of the first phase (2001-2002)  a mechanism to support loss-making activities, primarily passenger traffic, was no created.” 

According to the results of the second phase (2003 – 2005 ), the feasibility study for establishing specialized freight carriers  was completed. However, no conditions have been created to increase the number of competitors on the rail freight transport market  and the transportation of goods on the terms of a public contract.

During the third phase (2006 – 2010 years) , the legal and regulatory framework to ensure access the rail infrastructure services for all interested was not completed

The auditor noted the presence of additional unresolved issues.     

A significant portion of the commuter rail companies established under the structural reform are working at a loss. “Thus to compensate for losses in income of the Russian Railways, annually from the federal budget are allocated subsidies amounting to 25 billion rubles,”  said Valery Bogomolov, ACR Auditor. “According to Rosstat, the value of fixed assets of rail transport has increased significantly, while the company has high rates of depreciation of its fixed assets – 65%” explained Golikova.  “A high degree of depreciation of fixed assets industry – a loss of technological sustainability of rail transport. “ 

The railway network still does not cover the entire country. Currently 6 regions of the Russian Federation (Republic of Altai, Tuva Republic, Nenets, Magadan region, Chukotka Autonomous Area, Kamchatka Region) have no rail links. The railway network of ten other areas is undeveloped.

Today, Russian Railways issued a press release stating that in the first 10 years of railway reform, the company fulfilled all the tasks set by the state. It provided, and continues to provide, stable and sustainable rail transport operations in the interests of the Russian economy, fulfilling all the necessary transportation of freight and passengers and maintaining proper rail transport security and safety.

Since 2003, the holding company RZD has transported more than 12.5 billion tons of freight and 11.5 billion passengers, invested about 4.3 trillion roubles in developing infrastructure and modernising fixed assets, increased worker productivity more than two-fold and significantly increased industrial security, with the number of accidents falling by 24%.

Structural changes at Russian Railways itself, as envisaged by the reform programme, were mainly completed by the end of 2011. As a result of creating 85 subsidiaries and affiliates and the intention to hive off non-core assets, potential competitors and competitive types of activities in various areas have been or will be separated out from Russian Railways:
– freight wagon operations;
– long-distance and suburban passenger transport services;
– carriage and wagon repair services;
– locomotive capital repairs;
– design and construction;
– industrial manufacturing;
– research and development;
– trade;
– catering etc.

All this work enabled the creation of a genuinely competitive environment in those market segments where such mechanisms had not existed previously.

As a result of the reforms, the proportion contributed by the RZD holding to Russia’s GDP declined by nearly one-third, from 3.8% in 2004 to 2.2% in 2012, although the share of rail freight as a percentage of the total freight turnover in the Russian Federation increased by 5 percentage points, from 39% to 44%. Even taking into account the revenues of all operators, according to expert estimates the contribution of the rail industry to Russia’s GDP declined. This can be viewed as a reduction of the transport cost component in the price of products, which was one of the goals of the reform.

The fact that tariffs at Russian Railways have been held lower than the level required for commercial viability has been a significant factor in restricting the Company’s ability to upgrade and develop infrastructure.

Russia’s railway infrastructure is one of the busiest in the world, second only to Chinese railways and substantially exceeding that in Europe. Every year, each kilometre of main line routes in Russia carry more than 26 million ton- kilometres.

The changes in the structure of the Russian economy have also led to the fact that a significant part of freight traffic is concentrated on some of the most congested lines. This significantly restricts through capacity on numerous routes.

The systemic mechanism of a “network/regulatory” contract as a system of agreements between the infrastructure owner and the state and underpinned by legislation, as envisaged by the “Target Market Model”, has still not come into force.

Also still not in effect is the mechanism for the formation of long-term tariffs on the basis of the methodology developed and approved by Russia’s Federal Tariff Service, which calculates a normative rate of return when determining long-term indices of tariff changes at Russian Railways.

With regard to the passenger segment, as part of the reform programme, passenger services have been hived off from Russian Railways and subsidies introduced for passenger transport. As a result, cross-subsidies between freight and passenger transport have been eliminated, as planned in the reforms.

However, due to the lack of mechanisms governing state orders for passenger transport which are fully backed up by legislation, breakeven and financial sustainability of the passenger rail companies have not been achieved, so Russian Railways is continuing to support its subsidiaries. Thus, Russian Railways has spent an estimated 22 billion roubles supporting suburban commuter services in 2013:

– about 5 billion roubles – by setting low rents for motorised railcar rolling stock,
– Russian Railways incurred a loss of 8 billion roubles as a result of providing infrastructure services,
– under-compensated revenues from suburban rail companies due to tariffs set by the regions for passenger transport which are below the economically justified level amounted to about 9 billion roubles.

In long-distance passenger services, 2013 saw a reduction of federal subsidies to compensate for falling revenues in the regulated segment. This led to fares in sitting and open sleeping carriages having to be indexed twice during the year by 10% (the need for subsidies amounted to 36.3 billion roubles, but only 23.2 billion roubles were actually received). As a result, rail transport in terms of sitting and open sleeping carriages suffered a significant loss of competitiveness compared to air and road transport.

The lack of a systematic mechanism for financing socially significant passenger transport represents a barrier to attracting the private sector and private capital to this segment and, consequently, to the full development of competition.

 Source*http://www.ach.gov.ru ; RZD

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