OREANDA-NEWS. On May 20, 2009 The Board of Russian Railways held a meeting in Moscow under the chairmanship Vladimir Yakunin, President of Russian Railways, at which it considered and approved a concept to set up a second freight company, reported the Official website Russian Railways. 

"The Russian Railways Board unanimously approved the establishment of a second freight company. We have a tight timetable: all the documents should be ready by the end of 2009 or early 2010 at the very latest," said Yakunin after the meeting.

In accordance with the Targeted Market Model, the decision to liberalise the market further by transferring the remainder of the Russian Railways wagon fleet to the Second Freight Company was to have been taken in 2008-2009.

Any choice on developing the operation of rolling stock and restructuring Russian Railways’ wagon fleet must take into account the need to ensure equal conditions on the market of freight cars, as well as ensure uninterrupted traffic flows, especially for socially important goods. This in turn has to be based on the equal responsibility of all market players.

The key challenge to be solved when reforming the system for the provision of freight cars is to increase the actual output of the freight car fleet. This assumes the implementation of all order volumes using the minimum number of wagons from the fleet with the maximum mileage per loaded car per annum.

An analysis of all available options showed that the best way to achieve these objectives is to establish the Open Joint Stock Company (OJSC) Second Freight Company in accordance with the scheme outlined in the Targeted Market Model as a major operating company with a fleet of wagons comparable in scope and structure to the property of the OJSC First Freight Company.

In order to meet the key reform targets in handling freight cars and to realise the optimal restructuring model under the Targeted Market Model for rail transport services, as well as for the establishment of the Second Freight Company, it is proposed to:

assign to the charter capital of OJSC First Freight Company 60,000 freight cars, including 24,200 bulk grain carriers and 35,800 open-box cars;

write off as scrap metal freight cars with expired service life which are no longer suitable for transportation purposes and whose repair and restoration are economically impractical. This category is provisionally estimated at 32,000 (excluding cars in reserve);

assign to the charter capital of OJSC Second Freight Company the remaining fleet of freight cars. The market value of the transferred wagons will be determined by an independent evaluation. The number of wagons to be assigned to the charter capital of OJSC Second Freight Company by Russian Railways is provisionally estimated at 217,000;

Russian Railways will retain ownership of about 30,000 freight wagons for its own transportation business.

In order to create a fleet of freight wagons for the Second Freight Company which is equivalent to the volume and structure of wagons at OJSC First Freight Company, it is planned to bring in partners which will be involved in the setting up the Second Freight Company, for example, operators, leasing companies and cargo owners with their own rolling stock. When the Company is being established, these will be able to contribute to its capital freight wagons they own at market value as determined by an independent appraiser using the same methodology which will be used to evaluate the cost of wagons owned by Russian Railways.

Thus, the Second Freight Company’s amount of share capital will be determined taking into account the contribution of other market participants. It is also assumed that when the Company is being set up, private business can obtain capital of not less than 25% +1 share.

When the Second Freight Company begins commercial activity and the transfer of its ownership of all freight cars has been completed, an IPO will be held, after taking into account the situation on the financial markets. The planned date is no earlier than 2011. The Second Freight Company is expected to begin commercial activity in the first quarter of 2010.

The Company will thus be capitalised as a result of these contributions on the part of Russian Railways and the other shareholders. The stakes owned by shareholders will represents liquid assets whose sale should ensure a return on the investment made when setting up the Company.

Implementing this model will ensure the creation of comparably-sized businesses in the shape of the First and Second Freight Companies that will own and operate their own cars and enter into contracts with customers.

Despite the significant business of both companies, they will not hold a dominant position or create serious obstacles to the development of other market participants. At the same time, however, new incentives to consolidate their businesses will appear for the other market players, whose numbers now exceed 2,000.

Russian Railways will still be able to act as an agent of these companies and on the basis of agency agreements use their cars, along with cars of other owners, to service shippers.

As a result, a competitive market for the operation of freight rolling stock will be created. The First Freight Company will have a market share of about 27.5% (266,000 cars) and the Second Freight Company between 27-29% (265,000-283,000 cars subject to the proviso that 50,000-70,000 cars belonging to private owners are assigned to the capital). Other owners will hold the remaining 430,000-450,000 wagons (44%).

The implementation of the Targeted Market Model and the creation of OJSC Second Freight Company are expected to have the following benefits:

cargo owners and shippers: enhancing flexibility and service quality; reducing traffic load as competition develops; the opportunity to enter into long-term contracts to guarantee the shipment of loading resources.

the state: implementing the goals and objectives of structural reform; developing competition in the operator segment and completing its reform; guaranteeing transport users access not only to rail transport services, but also to services providing rolling stock by creating large competing companies across the whole network; maintaining control mechanisms over part of the fleet to ensure solutions to government objectives; stimulating the demand for freight wagons; setting up additional sources for the renovation and development of major funds at Russian Railways by selling shares in the First and Second Freight Companies;

Russian Railways: creating equal conditions for business; maintaining the technological efficiency of the shipment management system; realising the potential to increase the value of the Russian Railways’ holding company and the future establishment of sources of funding for the renewal and development of infrastructure through the sale of shareholdings in the First and Second Freight Companies.

other shareholders of Second Freight Company: provide an opportunity for the market to invest in a competitive company with high development potential and a diversified business; capitalising the asset after the Second Freight Company’s IPO; making more efficient use of assets; establishing equal conditions for the assessment of the market value of cars in the capital of the Second Freight Company.

Russian Railways considers that at the same time as establishing the Second Freight Company, it is necessary to ensure the development of a regulatory framework, technological standards and rules for the effective functioning of the market in the new environment.

Such initiatives will soon be sent to Russia’s Ministry of Transport and other relevant federal authorities to prepare agreed solutions. It is anticipated that improving the regulatory framework and rules will be completed by the time the Second Freight Company will be founded.

Russian Railways will develop a business plan for the Second Freight Company based on the approved Concept, which will then be considered by the Board of Directors of Russian Railways.