Russia has fallen into the same trap as America

28.03.2012 — Analysis

Russian industrialists are ringing the alarm: Over the last six months the railway freight rates have doubled and are going to increase further by summer. Russian Railways, OJSC, explains the increase by the deterioration of the infrastructure and promises special rates to large industrial enterprises in return for investment in the track facilities. Experts agree that bottlenecks cannot be expanded without heavy investment in the sector; however, they see the ill-conceived reform initiated by Russian Railways as the main reason for the decreasing efficiency of the railroad. The RusBusinessNews columnist has found out that commercializing of the monopoly networks resulted in discrimination of business and "shady" revenues of the monopolist.

On the eve of 2012 the railway freight rates were reported to jump by 6%. In February the First Freight Company, OJSC, adjusted them by another 3% on average. It was explained by the necessity to pull up the transportation prices to the mid-market prices. Disgruntled metallurgists informed journalists that the largest Russian operator "pulled them up" on too many occasions: The expenses of industrial enterprises on transportation in railcars of the Russian Railway's subsidiary have increased more than twice since September 2011.

The rates grew in sync with the structural crisis of the Russian railroad. The labor efficiency at Russian Railways, as stated at the RUPEC portal by Sofia Katkova, the project manager at Morstroytekhnologiya, LLC, is ten times as low as in the world's leading countries; the average wear and tear of the fixed assets - 55% (for freight railcars - 87%). The infrastructure restrictions caused longer freight delivery period and disruption of many business processes.

When the situation in the sector became unbearable, a number of consignors decided to rectify track "traffic jams" through their own efforts. For example, SIBUR-Trans, CJSC, is planning to commission additional tracks at the Noyabrsk-2 station in July 2012, thus being able to use the loading rack for transportation of natural gas liquids at full capacity. Besides, the company intends to revamp the public tracks at the Tobolsk station and to improve performance of some other stations. The agreement with Russian Railways has also been signed by NOVATEK, OJSC, which promised to invest 30 billion rubles to increase traffic capacity of the Sverdlovsk railroad infrastructure, while the railway company agreed to transport freights at acceptable rates in return for the investment.

Experts have a skeptical attitude to the plans of gas and chemical companies: Investment will be wasted with the present-day freight turnover. S. Katkova states that developed countries use differentiated rates, depending on the type of transportation, traffic density, freight weight, etc. In Russia any discussion of price discounts is senseless: The company can build its own terminal, deliver the cargo at attractive rates, and the cargo...will get stuck somewhere on its way across the huge territory of the country. The cargo delivery is so slow that one might consider collecting a penalty from Russian Railways for disruption of business processes.

In the meantime, Russian Railways pass their faults in operation of the railway on to consignors. The reform of railway transport was initiated to stir up competition among private carriers and, consequently, to decrease expenses on delivery of cargoes. However, the result turned out just the opposite: the availability of transportation has dwindled dramatically, and railcars are provided with substantial markups. Having assessed the situation, the RF government ordered to transfer the management of the railcars operated by the First and the Second Freight Companies to Russian Railways. However, it brought no relief to industry.

At the end of December 2011, large crushed stone manufacturers wrote a letter to the head of Sverdlovsk Railways to inform him that the system of requests for railcars was totally inefficient as it had lost its transparency. The Center of Premium Transportation Service at Russian Railways, which was responsible for operation of the rolling stock of the First and Second Freight Companies, dismisses requests without any explanation of the reason. The railway satisfies the needs of consignors only at 5-10%.

Gleb Kinder, the head of the Railway Transport Commission at the Opora Rossii (Support of Russia) public organization, told RusBusinessNews that today Russian Railways is operating about 22% of the existing railcar fleet, as it signed contracts only with 700 customers all over the country. The other 102 thousand railcars are not available for shipments under specious excuses. In the Far East the railway company turns down requests for transportation because "Moscow has not explained how to compute rates"; Siberian railroaders report that the entire rolling stock has been provided for coal loading and transportation; in the Urals the priority is given to transportation of social freights. Other reasons include shortage of locomotive engines, engine drivers, rails, etc.

Pavel Belousov, Deputy General Director for Production at SIBUR-Trans, CJSC, thinks that many problems can be solved: For example, the problem of shortage of traction rolling stock could be solved through local carriers; however, the expansion of such companies has been put on hold by public entities that are not interested in allowing private engines to use public tracks.

Vitaly Fedotov, Commercial Director of Seversnabkomplekt, LLC, states that there are enough railcars - even with some excess; that is why all references to unavailability of rolling stock because of coal transportation do not have any ground. The issue is different: The market has added new players - the companies that were first affiliated with the First and later with the Second Freight Companies, and they offer business people to give contracts for transportation into certain hands at the specified price. Those who did not agree to this offer were left without railcars and eventually had to accept conditions of the blackmailers. It resulted in "mid-market" prices that today are seen as standard by the First Freight Company.

Entrepreneurs, as it was pointed out in the Kommersant newspaper by Yuri Saakyan, General Director of the Institute of Problems of Natural Monopolies, have to pay for things they have never paid before. The reform in the sector has resulted in increased overall transportation burden on consignors.

Sofia Katkova thinks that Russia has encountered the same problem that was typical of other countries, which decided to reform their railway years ago. The survey conducted in the United States of America has shown that the separation of transportation business from infrastructure-related business results in a 20-40% decrease in efficiency, while the organizational separation causes a 70% decrease. According to the expert, this is the very situation we are facing now in the process of restructuring of the railway sector management system.

Vladimir Terletsky