Structural reform of the national railway system
The Structural Railway Reform Programme was approved by the Government of the Russian Federation on 18 May 2001.
The objectives of the reform were:
- to increase the reliability, accessibility and safety of rail transport, improve the quality of transport services in order to guarantee the unity of the country's economic space, and ensure nationwide economic development;
- to build up a well-balanced transport system in the country;
- to reduce overall economic costs by reducing rail transportation costs;
- to meet the growing demand for rail transport services.
The Structural Reform Programme initially included three phases, all of which had been completed by 2010. The achieved results were acknowledged and approved by the Russian Government and international experts.
One of the main achievements of the reform was the development of the sector’s regulatory framework. The adoption of the laws “On Rail Transport in the Russian Federation” and “The Railway Transport Charter of the Russian Federation”, as well as other legislative acts, allowed the separation of the functions of state regulation from business operations and the establishment of a nationwide railway company in 2003 – OJSC Russian Railways.
A major result of the reform was the formation of conditions fostering the competition in the rail sector. Most of the competitive and potentially competitive businesses were transferred from the RZD parent company to its subsidiaries in the areas such as:
- operating freight railcars,
- long-distance and commuter/suburban passenger services,
- repair and maintenance of passenger coaches / freight cars / locomotives,
- construction and design of railway infrastructure,
- industrial production,
- research and development,
- retail and public catering,
- health resort services, etc.
Within the reform period, a total of 85 subsidiaries and affiliated companies of Russian Railways have been established.
The emergence of these companies led to:
- the further development of each competitive sector,
- improved operational and economic efficiency,
- the investor's lasting interest in these subsidiaries and an increase in private investment.
In accordance with the Government’s decisions, the shares of subsidiaries and affiliated companies have been sold over the past few years in order to further promote competition on the transport market and establish additional sources of investment for the development of railway infrastructure.
Funds raised from the sale of subsidiaries amounting to more than 285 billion roubles were spent on the implementation of the Russian Railways’ investment programme.
Reform of passenger transport services
The first major outcomes of structural transformations in the passenger railway sector were:
in long-distance services – the establishment of JSC Federal Passenger Company (as a subsidiary of Russian Railways) – a network-wide national passenger carrier. The company provides almost all domestic intercity passenger transport services and cross-border services;
in suburban/commuter services – setting up 25 suburban passenger companies (SPCs) that provide passenger transport services linking city centres with outer suburbs, commuter towns and other suburban residential areas. The co-founders of the SPCs were Russian Railways and the respective regional governments. Russian Railways provides SPCs with access to railway infrastructure and, if necessary, leases diesel or electric train units (EMUs).
As a result of the reform, passenger services were thus separated from infrastructure.
A number of independent private carriers have also appeared on the market, such as JSC TransKlassServis, Tver Express LLC and JSC Grand Service Express. However, their share in the total volume of passenger traffic is insignificant.
In the passenger sector, intra-modal competition occurs only on a limited number of routes which are considered the most popular. They typically do not exceed 1,000 km, have large volumes of passenger traffic and guaranteed effective demand. The most popular route is Moscow – St. Petersburg.
Passenger companies operate in a highly competitive inter-modal market and are facing serious competition, mainly from civil aviation and bus services.
The key principles for the organisation, management and financing of the suburban passenger complex were identified in the Concept on Suburban Railway Development, which was approved by the Government of the Russian Federation in May 2014.
Subsequently, a new regulatory framework aimed at increasing the Russian population’s transport mobility was established. The network of social commuter railway routes was adopted. Preferential infrastructure access charges and a zero rate of VAT were granted to SPCs by recent federal legislation.
The local governments have become responsible for passenger transport services in the regions. For this purpose, they have developed integrated regional transport plans and subsidise fares where necessary.
Further adjustment of the regulatory system is well under way.
Reform in freight transport services
The most notable changes have occurred in the segment of freight railcar operations, since this particular kind of activity was recognised as the most ready to face competition.
The adoption in 2003 of the new Tariff Catalogue No 10-01, which had unbundled the “wagon fee”, lent a strong impetus to the rapid development of private car operators.
With a view to promoting competition on the transport market, the Russian Government initiated a gradual exclusion of the car operating business from OJSC Russian Railways.
Between 2003 and 2010, a number of specialised subsidiaries (subsidiary and associated companies) operating their own fleets, were set up: JSC TransContainer, JSC Refservis, JSC Russkaya Troyka and JSC RailTransAuto. In addition, two network-wide operators of universal wagons were established: JSC First Freight Company and JSC Federal Freight Company.
By 2012, the entire commercial freight wagon fleet was withdrawn from OJSC Russian Railways and became private.
A few years later, after OJSC Russian Railways had sold its stake in JSC First Freight Company, the RZD Holding relinquished its dominance on the freight car operator market. Currently, the companies which are not affiliated with the RZD Holding provide services which account for 80 per cent of total freight turnover.
The reforms in this segment yielded the following positive outcomes:
- freight rolling stock underwent significant upgrades and renovation due to private investments;
- greater competition led to a more customer-oriented approach and a higher quality of service.
However, between 2010 and 2015, the attractiveness of this business had provoked an uncontrollable growth in the number of freight cars. The excessive amount of wagons often led to serious problems (both technological and organisational) in traffic control across the network. The regulator therefore had to impose appropriate measures, in particular aimed at tightening the requirements for wagon maintenance and service. As a result, the growth of the wagon fleet first reversed and then stabilised.
Structural reforms have resulted in a unique pattern of the freight rail market in the Russian Federation, which is characterised by the following features:
- a single network-wide carrier (OJSC Russian Railways) without its own freight car fleet;
- multiple operators of private fleets providing wagons for freight transportation.
This model was unique globally.
In order to make the model fully operational, it was necessary to update its regulatory framework. Therefore, in the years following the adoption of the “Target Model” by the Government in January 2011, the sectoral regulatory acts were revised and significantly updated.
A number of legal acts were adopted, including Federal Law No. 503-FZ dated 31 December 2014 “On Amendments to the Federal Laws ‘Charter of Railway Transport of the Russian Federation’” and ‘On Railway Transport in the Russian Federation’”.
This law has introduced new provisions, such as: charging for private wagons placed on the public railway infrastructure; empowering the public carrier to haul private empty freight cars from the public network; introducing special requirements for empty car transportation.
In 2015, additional legal acts highlighting the following issues were adopted and entered into force:
- rules for empty freight car transportation on the railway network;
- charges for using the public railway infrastructure;
- criteria for refusing to handle empty wagons;
- rules for shipping cargo (goods) by wagon groups on a single invoice (the updated version of the Rules entered into force on 4 July 2015).
The new legislative initiatives were intended to stimulate more efficient use of rolling stock and infrastructure carrying capacities by all participants in the transportation process.
At the current stage of reform, the primary challenge facing the industry is to achieve a balanced market model based on the pattern “Single Carrier Without Wagons – Мultiple Car Operators” and develop clear mechanisms to regulate it.
The further development of the rail freight market will be determined within the Target Model concept for the next five-year period (until 2022).