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Aug 23, 2017 13:08
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FAQ

General issues

Russian Railways (RZD) has a monopoly in transportation. What about cooperation with private operators? Do Western investors express interest in it?

The rail transport reform has provoked competition in the field of freight transport and the appearance of many private operators. Already now the private fleet of freight cars is more than the inventory, and private operators are successfully competing with Russian Railways in the segments of so-called highly profitable transportation.

The target model of the railroad transport services market provides for the successive creation of the two RZD subsidiaries in the sphere of handling rolling stock. As a result, the formation of a competitive market will be completed and most favorable investment attractiveness of this business segment provided.

In order to work in equal legal conditions RZD has founded the subsidiary joint stock company First Freight Company. It has been set up to improve the service for freight owners and attract funds for railway rolling stock renewal.

A landmark decision on the creation of the Second Freight Company (SFC) was made at the Board of Russian Railways in May 2009. The company is considering the possibility of involving other owners in the Second Freight Company who could be offered to invest their freight cars in the authorized capital.

In the current financial economic crisis many owners practically stopped purchasing new rolling stock. And a decline in traffic volumes this year has a negative impact on the results of their work. Meanwhile, it is easier for major companies to overcome the negative influence of the economic situation.

Different owners could become partners of JSC Russian Railways in the SFC creation, including leasing companies, operator companies, as well as freight owners with their own rolling stock. At the initial stage they could already have 25% + 1 share in the capital of the company being created.

Investors pay considerable attention to the infrastructure projects carried out by RZD. Even now some banks and private operators are taking interest in the founding of Second Freight Company. Foreign investors took active participation in the private placement of shares of JSC Transcontainer that took place in January 2008.

The European Bank for Reconstruction and Development has bought 9.25% shares, while some foreign funds have purchased 2.5% shares each.

At the moment Russian Railways has 57 subsidiary companies. Why so many? What opportunities of entering the railway transportation market do non-governmental players have?

The foundation of the company Russian Railways is a result of the structural reform of railway transport in Russia that began in 2001. The main idea of the reform was to separate the proper monopoly activity of the company from the fields of activity where competition would be possible and to attract private investment and private initiatives to the competitive segments. Besides, it was meant for the stopping of cross-subsidy, the rising of flexibility in operating tariffs, the increasing of investment opportunities in the industry and the improving of transparency in the railroad business.

The program of the structural reform is forming the major transport holding Russian Railways: 56 subsidiary and affiliated companies were created. Many kinds of auxiliary activities (repair, industrial production, design and survey works, research activity etc.) are separated from the infrastructure and transportation and operating in the competitive environment now.

Since 2003 the total assets of the subsidiary and affiliated companies of RZD have increased twenty-four-fold, proceeds – twelve-fold, and net profit twenty-nine-fold. Nowadays the business scale of subsidiary associations totals a third in comparison with the holding company. Russian Railways’ board approved the creation of a range of other companies in the near future: Second Freight Company and Federal Passenger Company.

As a result the formation of a competitive market will be completed and maximum investment attractiveness of those markets segments should be provided.

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