OREANDA-NEWS. February 14, 2014. The rail transport structural reform programme has been underway for 13 years and has dramatically changed the rail industry in Russia.

As a result, there has been a transition to a market for railway transport services which employs several thousand private companies representing forwarding companies, operators and logistics services, as well as all kinds of repair services.

As rail reform was implemented, much attention was focused on preventing irreversible negative consequences for consumers and the economy. As a result, a series of measures that were originally planned underwent subsequent adjustment. However, all the changes were discussed by Russia's federal executive authorities and market participants and approved by government authorities within their respective action plans.

In the first 10 years of its operation, Russian Railways fulfilled all the tasks it was 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.