STUDIES OF ECONOMIES IN TRANSFORMATION '23LAS Transport Strategies . CI 3 for the Russian Federation Jane Holt 9 THE WORLD BANK RECENT STUDIES OF ECONOMIES IN TRANSFORMATION PAPERS No. I Country Department 111, Europe and Central Asia Region, Food and Agricultural Policy Reforms in the Former USSR: An Agenda for the Transition No. 2 Michalopoulos and Tarr, Trade and Payments Arrangements for States of the Former USSR No. 3 Country Department 111, Europe and Central Asia Region, Statistical Handbook: States of the Former USSR No. 4 Barr, Income Transfers and the Social Safety Net in Russia No. 5 Country Department III, Europe and Central Asia Region, Foreign Direct Investment in the States of the Former USSR No. 6 Wallich, Fiscal DecentraliZation: Intergovernmental Retations in Russia No. 7 Michalopoulos, Trade Issues in the New Independent States No. 8 The World Bank, Statistical Handbook 1993: States of the Former USSR STUDIES OF ECONOMIES IN TRANSFORMATION PAPER NUMBER 9 Transport Strategies for the Russian Federation Jane Holt The World Bank Washington, D.C. Copyright (© 1993 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 1993 Papers in the "Studies of Economies in Transformation" series present the results of policy analysis and research on the states of the former USSR. The papers have been prepared by World Bank staff and consultants and issued by the World Bank's Europe and Central Asia Country Department III. Funding for the effort has been provided in part by the Technical Cooperation Program of the World Bank for states of the former USSR. In light of the worldwide interest in the problems and prospects of these countries, dissemination of these findings is encouraged for discussion and comment. 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ISSN: 1014-997X Jane Holt is senior transport financial analyst in the Infrastructure/Energy/Environment Division of Country Department III, Europe and Central Asia Region of the World Bank. Library of Congress Cataloging-in-Publication Data Holt, Jane, 1945- Transport strategies for the Russian Federation / Jane Holt. p. cm. - (Studies of economies in transformation, ISSN 1014-997X: paper no. 9.) Includes bibliographical references. ISBN 0-8213-2625-2 1. Transportation-Russia (Federation) 2. Transportation-Russia (Federation)-Planning. 1. Title. 11. Series. HE255.2.H65 1993 388'.068-dc2O 93-32003 CIP Contents Foreword ... ix Abstract ........................................................ xi Acknowledgments .xii Abbreviations and Acronyms ..... xiii Glossary ..................................................... xv Overview and Recommendations ......................................... I i Economic and Financia Performance of Russia's Transport System ................ 23 2 Institutional Framework for Transport .................................. 51 3 Railways ..................................................... 59 4 Road Transport. 87 5 Urban Passenger Transport .101 6 Highways ................................................... 107 7 Waterborne Transport ............................................. 121 8 Airlines and Civil Aviation .......................................... 157 9 Transport Equipment Manufacturing ................................... 181 iii Annex A Statistical Summary of Transport Demand Forecasts .................... 193 Annex B Compilation of Primary Transport-Dependent Industry Economic Forecasts for Railways and Waterborne Transport ............................ 195 Annex C Derivation of Estimates of Physical Consumption of Energy in the Russian Transport Sector ..................................... 209 Annex D Compilation of Privatization Acts in the Transport Sector of the Russian Federation ......................................... 215 Annex E Russia's Principal Sea Carriers: Their Fleets and Trading Patterns in 1991 ... .. 245 References ...................................................... 249 NMAS: IBRD 24770R ............................................. 255 IBRD 24771R ............................................. 256 iv Exhibits TEXr 1.1 Russian Freight Transport Task, 1992 Estimates ........................... 24 1.2 Modal Shares of Soviet International Trade Tonnage, 1988 .................... 25 1.3 Transport Ton-Kilometer per Dollar of GDP (Road, Rail and Water) .............. 27 1.4 Volume of Russian Freight Transport ................................. 28 1.5 Domestic Freight Transport Demand and Its Relation to GNP Growth Rates .... ..... 29 1.6 Energy Transport Demand, 1980 to 2015 .............. ................. 32 1.7 Non-Energy Transport Demand, 1980 to 2015 ............................ 32 1.8 Passenger Demand, 1980 to 2007 ............ ........................ 33 1.9 Russian Rail Passenger Projections ........... ........................ 34 1.10 Russian Rail Freight Projections .35 1.11 Actual and Forecast Volumes of Russian Freight Transport, 1991 to 1995 .36 1.12 Actual and Forecast Russian Freight Transport Task .37 1.13 Rail Share of Combined Rail and Truck .38 1.14 Urban Passenger Transport Operational Losses .39 1.15 Financing Transport from the State Budget, 1992 .40 1.16 Transport Subsidies Compared to Total State Budgeted and Unbudgeted Subsidies, 1992 . .41 1.17 Subsidies on Energy Consumption, 1992 .42 1.18 Physical Energy Consumption by Transport Modes, 1992 .43 1.19 Transport Tariff Index Adjustments .45 2.1 Structure of Transport within the Russian Government ....................... 52 2.2 The Ministry of Transport . ....................................... 54 3.1 Coverage and Performance of the Former USSR Regional Railways Compared to Other Major Railways, 1990 .............................................. 60 3.2 Soviet and Russian Railway Categories and Employment Levels ................. 61 v 3.3 Former USSR Railway Data ....................................... 63 3.4 Russian Railways: Indexed Traffic Trends, 1980 to 1992 ..................... 64 3.5 Percentages of Common Carrier Shipments by Type of Transportation ............. 65 3.6 Rail Freight Traffic Trends in Europe, 1988 to 1992 ........................ 66 3.7 Common Carrier Rail Traffic ...................................... 67 3.8 Daily Wagon Loads in the CIS by Republic ............................. 68 3.9 The Directorate of the CIS Railway Transport Council ....................... 70 3.10 Railway Equipment Production and Delivery Statistics .71 3.11 Number of Track Kilometers Subject to Speed Restrictions .73 3.12 Track Material Deliveries .74 3.13 Locomotive Replacement and Maintenance .74 3.14 Comparision of U.S. and FSU Railway Labor Productivity Levels .75 4.1 Russian Trucking Fleet .......................................... 90 4.2 General Use Road Transport Vehicle Load Capacity, 1970 to 1991 ............... 92 4.3 Actual and Forecast Truck Capacity vs Transport Demand in the Russian For-Hire Trucking Industry, 1990 to 1995 .................................... 93 6.1 Russian Federation Road Network .................................. 108 6.2 Federal Road Conditions (two-lane equivalent) .......................... 110 6.3 Public Road Network Expenditures ................................... 112 6.4 Projected Funding for Public Roads to be Financed from Road Funds, January 1993 ... 113 7.1 Status of the Former Soviet Merchant Fleet, July 1, 1992 .................... 122 7.2 Merchant Fleets of the World ..................................... 123 7.3 Cargo Turnover in Russian Seaports ................................. 124 7.4 Russian Seatrade Volumes by Type of Cargo ........................... 125 7.5 Transportation Used by Russian Firms for Deliveries ....................... 126 7.6 Cargo Turnover in FSU Ports, 1990 and 1991 ........................... 127 7.7 Tonnage Throughput of Russian Maritime Shipping Basins and Major Ports, 1991 .... 130 7.8 Cargo Handling Rates at Three Major CIS Ports .......................... 131 7.9 Characteristics of Key Russian Seaports and Proposed Investments, 1991 .... ...... 135 7.10 Typical Shipping Company and Port Operations Organizational Structures ... ....... 146 7.11 Merchant Fleet Age Distribution, 1992 ................................ 147 7.12 Ships on Order in Russian Yards, January 1993 .......................... 147 7.13 Ships on Order by Russian Interests, January 1993 ........................ 148 7.14 Inland Water Transport Tonnage, 1990 ................................ 151 8.1 World's Major Airlines, 1990 ..................................... 158 8.2 Regional Aeroflot Administrative Departments circa 1990 .................... 159 vi 8.3 Aeroflot Profit and Loss, 1988 to 1991 ............................... 161 8.4 Aeroflot Traffic Performance and Operational Results, 1991 (Domestic) .... ....... 162 8.5 Aeroflot Traffic Performance and Operational Results, 1991 (International) .... ..... 163 8.6 Inter-State Aviation Committee, 1991 ................................. 166 8.7 Aeroflot - Soviet Airlines ........................................ 167 8.8 Budget Request for Financing Federal (Interstate) Air Transportation ............. 169 8.9 Accident Rates (Passenger Service) .......... .. . . .. . .. . .. . . .. . .. . .. . . 170 8.10 New Airline Routes over Russia .171 8.11 Comparative Fuel Consumptions .172 9.1 Railway Asset Manufacturing Sources in FSU Countries .183 9.2 Russian Truck Production Capacity .185 ANNEXES A. 1 Energy Related Domestic Transport Demand, 1980 to 2015 ...... . . . . . . . . . . . . . 193 A.2 Non-Energy Related Domestic Transport Demand, 1980 to 2015 ...... . . . . . . . . . . 193 A.3 Domestic Freight Transport Demand and Its Relation to GDP Growth Rates ... ..... 194 A.4 Non-Energy Freight Task by Mode ................................. 194 B. 1 Characteristics of Economic Planning Regions ........................... 196 B.2 Economic Planning Regions of the Former USSR ......................... 197 B.3 World Coking Coal Trade, 1990 ................................... 199 B.4 USSR: Hard Coal Exports by Destination ........ ..................... 200 B.5 Major Oil Refineries in Russia . ................................... 201 B.6 Major Russian Steel Plants ........................................ 203 B.7 Composition of CIS Grain Consumption ......... ..................... 204 B.8 Projected Grain Demand in Year 2000 .......... ..................... 204 B.9 Grain Imports to the CIS, 1990 . ................................... 205 B. 10 Forest Products Trade, 1988 ...................................... 207 C. 1 Estimated Aircraft Fuel Consumption ............ ..................... 210 E. 1 Performance Indicators of Russia's Principal Sea Carriers .................... 245 vii Foreword Russia's transport system, developed for a an unsubsidized cost structure becomes clear, command economy, will require substantial careful analysis will be required to ensure that restructuring to meet the needs of a market proposed transport investments are justified on economy. The structure of the industrial and economic or social grounds. The downturn of the transport sectors, coupled with low energy prices, economy, along with the shift from transporting have led to a far more intensive use of transport in raw materials and industrial goods to transporting Russia than in other economies: almost six times lower-density general freight, will keep transport as high as the United States and four-and-one-half levels below their peak of 1988 for years. times as China. Furthermore, a shift from rail to road transport is Intensifying the need for basic restructuring are inevitable, particularlyfortime-sensitiveshipments problems stemming from the present economic and short-haul traffic. situation and the breakup of the USSR. Lower This report on Russia's transport sector reviews output reduced the demand for many transport the issues and assesses alternatives for improving services; and the dissolution of the USSR has had the efficiency of transport operations and making a deleterious effect on the supply of vehicles and them more market-oriented. The report also spare parts for all modes of transport, particularly assesses the effect transport reforms and for the railway system. The sector's performance investments will have on economic recovery and is declining as a result and the government is of the fiscal impact that transport enterprises may increasingly called on to cover operating losses have on the government's budget. The study is and finance investments. intended for policymakers and their advisers in the The government recognizes the need to Russian Federation and other republics of the restructure the transport sector. It has begun former USSR. All those interested in transport, in privatizing many transport operations and has distribution systems, in fiscal reform issues, and in taken steps toward freeing prices. But the the critical role that privatized transport operators vertically integrated, centralized and monopolistic can play in facilitating economic recovery should structure of the sector has made achievement of find this study useful. reforms more difficult than anticipated. At the same time, the lack of knowledge of how much the coming economic rationalization of the energy and industrial sectors will require changes by the transport sector has led to pressure to return to the Russell J. Cheetham old system. Director This means that until Russia's economy is Country Department III restructured and the true level of demand based on Europe and Central Asia Region ix Abstract This report assesses Russia's transportation sector and offers courses of action to arrest its decline and to manage its transition to a system more suited to a market-based economy. The study covers railways, road transport, urban passenger transport, highways, ports, maritime and river transport, airlines and civil aviation, and transport equipment manufacturing. It reports on the infrastructure assets, the institutional framework, and the operating and financial performance of each mode. The study also analyzes the economic role and fiscal impact of each mode on the national economy and assesses how that role may change in the future. On the basis of this analysis, a strategy for change is developed, along with recommendations for the Government of the Russian Federation to help the transport sector adapt to its new market role. xi Acknowledgments This report is based on background papers and Invaluable support, cooperation and basic data other chapter inputs prepared by a transport sector was provided by our Russian counterparts: Mr. team that visited Russia on a number of occasions Vitali Efimov, Minister of Transport, Mr. Jakov during 1992 and 1993. Jane E. M. Holt was the V. Serov, Chief of External Economic Relations leader of these missions and the principal author and many other transport officials within the of this report which was based on contributions Ministry of Transport and its modal operating from: Kirk Hagen and Werner Hauser (road departments; Mr. Gennadiy M. Fadeyev, Minister transport and truck manufacturing); Melody of Railways, and others within MPS; Mr. Piotr Mason and Cesar Querioz (highways); Hans Kushnaryov, Head of the Department for Peters (maritime, ports and river transport): Louis Financing Transport Systems, Ministry of Thompson and Julie Fraser (railways); Thomas Finance; and Mr. Rostislav Rutkovsky, Head of Till (institutional framework, road transport, and Complex, Ministry of Economy. The work also urban transport); Richard Podoiske (urban benefited greatly from discussions with many transport); Jeff Procak (railways and equipment other Russian experts - too numerous to mention manufacturing). - who generously shared their insights. The report also relies in part upon economic Good advice, valuable comments and insightful forecasts, background data and investment suggestions were received from many. In analyses contained in consultant studies financed particular the study has benefited from the by the European Bank for Reconstruction and expertise of World Bank staff: Jonathan Brown, Development (EBRD). The report reflects the Marc Blanc, Costas Michalopoulos, Marcelo experience of the International Financing Selowsky, Yukon Huang; peer reviewers Michel Corporation (IFC) with respect to privatizing Ray, Agustin Litvak, Simon Thomas and the late trucking in Nizhniy Novgorod. Insights regarding Philip Blackshaw; and other transport colleagues energy demand were provided by Charles Jean Marie Lantran, Gilbert Caroff, Eugene McPherson, Doug McKay and David Craig; fiscal Vernigora, Anthony Pellegrini, Alfredo Soto and data and macro-economic linkages regarding Zmarak Shalizi. Outside review was provided by implicit energy subsidies were provided by modal experts within the US DOT, as coordinated Philippe Le Houerou, Paulo Vieira da Cunha and by its Office of International Transportation and Elana Gold. Bert Schacknies of the U.S. Trade. Assistance with graphics and other Department of Transportation, Federal Highway research support was provided by Jeff Procak and Administration, provided insights on the highway Julie Fraser. Karin Skeldon formatted and desktop sector. published the report. xii Abbreviations and Acronyms AAR Association of American Railroads EBRD European Bank for Reconstruction ask available seat kilometers and Development ASMAP International Road Transport EC European Community Association EMU electric multiple unit ATC air traffic control ERR economic rate of return AvtoUAZ Ulianovsk Motor Vehicle Plant FAA Federal Aviation Adminstration BAM Baikal-Amur Railway (U.S. Government) BOT build-operate-transfer FOB free-on-board bvk billion vehicle kilometers FHD Federal Highway Department FSU former Soviet Union CBR Central Bank of Russia CEE Central and Eastern Europe GAZ Gorki [Nizhni Novgorodl Motor cgt compensated gross ton Vehicle Plant CIF Cost-Insurance-Freight GDP gross domestic product CMEA Council for Mutual Economic GDR German Democratic Republic Assistance GKI State Committee for the CIS Commonwealth of Independent Management of State Property States GNP gross national product CPE centrally planned economies GOSTROI State Planning and Construction CSD CzechoSlovak Railways Committee CSFR Czech and Slovak Federal Gudok MPS newspaper Republic 1DM III Highway Design & Maintenance DB German Federal Railways Model DM deutsche mark DMU diesel multiple unit IBRD International Bank for DR German State Railways (former Reconstruction and Development GDR) ICAO International Civil Aviation DRSU uprdor maintenance units Organization DSC Directed State Credits ICB international competitive bidding DSU uprdor construction units IFC International Finance Corporation dwt dead weight tonnage IRI international roughness index xiii ISO International Standards PPF Project Preparation Facility Organization PTRC Public Transport Research Council RF Russian Federation KamAZ Kamsk Large-Truck Production RoRo Roll-on-Roll-off Association RSFSR Russian Soviet Federated Socialist Republic LCB local competitive bidding LiAZ Likinsk Bus Plant SNCF French National Railway Company SOE statement of expense MAK Interstate Aviation Committee SPA Scientific Production Association MAV Hungarian State Railways SZD Soviet Railways MAZ Belarusian Large-Truck Production Association TA technical assistance MINPROM Ministry of Industry TEU twenty foot equivalent unit MIS Management Information Systems tkm ton kilometer MOE Ministry of Economy TU traffic unit MOF Ministry of Finance MOP Ministry of Planning UGAT Central Regional Administrations MOT Ministry of Transportation of Civil Aviation MIPS Ministry of Railways UIC Union Internationale des Chemins NPO Scientific Production Association de fer NPV net present value UNCTAD United Nations Conference on Trade and Development OBO oil bulk carrier UralAZ Ural Motor Vehicle Plant OECD Organization for Economic USSR Union of Soviet Socialist Cooperation and Development Republics pass-km passenger kilometer VOC vehicle operating costs PCA Production and Commercial vpd vehicles per day Association PKP Polish State Railways ZIL Likhachev Motor Vehicle Plant xiv Glossary Agroprom agriculture industry amalgamation avtodor oblast-level road administration responsible for federal highway network road maintenance cabotage domestic port-to-port cargo transport demurrage downtime, or cost of time lost while loading and unloading beyond the scheduled time of departure krai administrative region Mosavtodor Moscow oblast state highway agency oblast region, a Soviet (now Russian) territorial-administrative unit okrug administrative district Rosagroprom Russian successor to the all-Union Agroprom Rosavtodor all-Russian autonomous state entity responsible for road construction and maintenance Rosavtotrans the organization overseeing all for-hire Russian truck transport Sovtransavto former all-Union international truck transport monopoly tare weight of a wagon when empty Union USSR uprdor highway-specific administration responsible for maintenance and rehabilitation of the specific highway to which they are assigned xv Overview and Recommendations Developed for the command economy of the * To avoid funding unnecessary investments former Soviet Union (FSU), Russia's transport and investments aimed at modernizing sectors that system is ill-suited to the needs of a market cannot be supported by the beneficiaries. economy, and the people who run it are not 0 To raise fuel prices to world market prices prepared for the massive transformations as soon as possible, so that the implicit subsidy necessary to meet those needs. At the same time, now given to transport does not further distort the Russia's economic difficulties and the breakup of industrial sector and emerging consumer the FSU have undermined the ability of the system industries. to operate. The financial performance of the Despite progress in privatizing some transport transport system is declining as a result of the operations, there is evidence that the system widening gap between revenues and costs that continues to try to operate under old rules and to stem from declining demand, rising fuel prices, reimpose them where market forces are starting to inflationary pressures on wages, and inevitable break them down; it should be adapting to today's demands to delay and limit tariffs. To fill the gap, economic circumstances and tomorrow's market government funds are increasingly being requested challenges. For example, the government's decree to cover losses and to finance investments that can in December 1992 concerning operational no longer be funded from operating revenues. planning for rail movements of freight for export Unless government takes action to help the could easily lead to the reimposition of centrally transport sector adjust to a market economy, the controlled and inflexible operating practices. This fiscal and economic burden of increasingly would be counterproductive to the inevitable massive operating losses and expensive and changes in the size and nature of demand that will unproductive investments will become prohibitive. be placed on the system as reforms take hold in Russia's economy. Over time, these changes will To address the fiscal burden, stronger efforts cause a significant shift in market share from rail are needed: to road transport. Reliability, speed, and * To adhere to the government's objectives to predictable service will become more important to privatize and eliminate monopolies in the transport customers than movement of large volumes at low system. cost in response to pre-determined plans. Such * To leave the supply and pricing of transport changes are difficult to believe for Russian services to the marketplace wherever possible. transport operators and government officials * To restructure parts of the system where a unfamiliar with the nature of customer demands in natural competitive framework will not easily market-based economies. Indeed, many transport evolve after privatization and elimination of officials believe that demand will return to old monopolies. levels and transport modes in a year or so and 1 Overview and Recommendations they continue to call for government to make the areas. Ways exist to keep urban transport losses to same sorts of commitments as in the past. a minimum. On the whole, this reform is best accomplished by privatizing as many transport Even if transport demand returned to old levels, functions as possible and letting the marketplace the historic production focus of Russian transport bring expenses and revenues into line. This is true enterprises would undermine the ability of even for urban transport where subsidies may still railways and other transport modes to provide the be required but where a combination of quality of service required by a market economy. privatization, competition and attention to In the past, freight transport operators focused performance criteria can help keep them to a primarily on producing services to support orders minimum. In some cases, remedying the basic placed months in advance by state-owned organizational, structural, and managerial enterprises. Not having to compete for traffic, problems of transport enterprises and government transport operators paid limited attention to agencies may require strategies designed providing their customers reliable, efficient specifically for the entity involved. Substantial delivery of services with little loss and damage. restructuring is particularly needed in the railway Shipping goods belonging to state enterprises did and port sectors to help them adapt to changing not demand a sense of accountability for good market conditions and become more responsive to service. The command economy's predominant private sector users. orientation toward production was inconsistent with the reliability, flexibility, economy, and A new regulatory and legal framework is attention to reducing loss and damage expected by needed. In accomplishing these changes, the service-oriented transport systems that serve government will concern itself less with carrying market economies. out transport operations and more with designing rules under which privatized operators will work. Understanding that changes in the economic Russia thus needs to think in new ways about its framework will fundamentally change the nature transport problems and to develop a new legal and and size of demands on the transport system is regulatory structure for acting on them. The legal essential to counteract inappropriate allocation of framework should encompass a set of basic resources, such as fuel; the proposal of principles, policies, laws, and regulations - unnecessary and costly investment projects at the perhaps codified in a basic transport act. As the expense of more urgent ones; and declining government has recognized, the structure should performance of the transport sector. Substantial, put as much of the sector's assets and operations rapid adjustment is necessary to ensure that as possible in a deregulated, competitively transport will respond to the needs of a market- structured private sector, in which determination based economy. Without greater efforts to reform of prices and investment is left to the marketplace. and restructure it, Russia's transport system may The government's role would then be limited to not be capable of responding to newly emerging one of setting policies to ensure that the market private sector users and could slow economic place works, that transport operations are development. undertaken safely, and that services are available In the case of macroeconomic policies affecting to users on an equal basis. fiscal subsidies - directed credits and lack of controls on the finances of state-owned enterprises Only where a monopoly or oligopoly exists - the measures needed are identical to those being would regulations regarding price and applied in other sectors throughout the economy. performance be brought to bear. This role is far The government should not be concerned that different from the hands-on planning and directing such measures are too harsh for sectors like of transport investments and operations that transport. Given the volumes of business involved, governmental transport institutions played in the there is no reason for ports, airlines, railways or past. It may be difficult to change old habits and road transport to lose money carrying freight or let the market place function, but this change is of passengers over long distances, except to remote vital importance. 2 Overview and Recommendations To gain insight, Russia should review the financial support to performance improvement and experience of transport systems that have proved cost recovery measures. To the extent they are effective in market-based economies and to the related to social purposes - such as support to the lessons learned by other countries that have northern regions - transport services should be improved their transport sectors: for example, provided under competitive bids as soon as trucking deregulation in Australia and the United practicable. In all cases involving subsidies, States; railway deregulation and restructuring in efforts should be made to isolate the revenues and the United States'; urban bus transport costs of the service into a separate corporation or deregulation in the United Kingdom; and the cost accounting unit, so that the subsidies are privatization of ports in Chile, United Kingdom, transparent and the real nature of the issue is and elsewhere. Transport systems that were once better understood. For example, it is advisable to highly regulated now work far more effectively isolate and treat suburban and commuter railway after being freed of regulation of price or market passenger services as separate units by location. entry. Overall, deregulation of railroads, trucking, and air cargo in the United States collectively Transport's share of the federal investment reduced freight transportation logistics costs from budget in 1992 represented 12 percent of the total 14.7 percent of GNP in 1981 to 11.7 percent in state investment budget, excluding defense. The 1986, saving about US$65 billion a year. bulk of the investment budget was for railways This report contains recommendations as to how (Rb22 billion), aviation (Rbl 7.8 billion), and road government can help the transport sector adapt to transport (Rbl 7.4) billion. To curb the growing these changes; a summary of these fiscal impact of transport, it is important that recommendations is contained in the matrix transport projects financed by the government are following this overview. Where possible, sound and of the highest priority. Given current suggested strategies have been grouped into those macroeconomic conditions, special care will be that should take place in the near term, the needed to guard against superficially attractive medium term and the longer term. investments in new infrastructure and equipment. Such investments may have been justifiable under Fiscal Policy the old rules but may not cover their operating and capital costs in the new economy. Generally the fiscal burden of transport is large and speaking, investments should be devoted to growing; explicit subsidies for operating losses essential reconstruction, maintenance, and training represented 11 percent of Russia's total budgeted projects rather than to expansion or subsidy payments in 1992, and were roughly modernization. Increased transport capacity is not equivalent to 2 percent of GDP. The financial needed in Russia; what is needed is to preserve performance of transport entities is declining. The existing capacity. Unfortunately, in many cases single greatest federal fiscal problem in transport investments aimed at modernization that require is urban transport deficits, but the explosive foreign currency are also dubious because their growth of deficits on suburban commuter railways rates of return are low and their costs cannot be and airline subsidies are enormous problems as recovered. The government has already approved well. To reduce the fiscal deficit, the government investments by railways and airlines, including will need to reduce transport entities' reliance on purchase of rolling stock, continued expansion of the federal budget and impose greater financial new rail lines, extension of electrification, discipline on state owned enterprises. No subsidies purchase of replacement aircraft, and development or directed Central Bank of Russia (CBR) credits of airports. Most of these investments are being should be provided to enterprises to be privatized. approved without assessing their costs and To the extent that such subsidies are related to the benefits: government's intention to soften the impact of * Although considerable evidence exists that price liberalization - such as fuel subsidies for the physical condition of essential railway airlines, tariff and fuel subsidies for urban infrastructure is declining, the Ministry of transport - it would be prudent to link such Railways' (MPS) investment plans focus on 3 Overview and Recommendations passenger reservation systems, foreign-made transport, capacity is not expected to be a problem passenger cars, and high-speed rail systems. for the next 4 to 5 years. Government and (World Bank analysis of a new high speed rail line transport managers need a better understanding of between Moscow and St. Petersburg indicates when and why they are losing money. Transport that, even given a ridership level of 12 million accounting systems are currently a major obstacle passengers, a one-way fare of US$123.00 would to correcting structural and operational be needed to break-even on total costs, assuming inadequacies. Enterprises cannot be restructured, construction costs of US$7.4 billion and a 50 costs cannot be isolated and analyzed, and percent operating ratio.) Investments in passenger investment cannot be rationalized without properly service may have political merit but should structured operational and financial information. include the means to improve cost recovery; otherwise they will widen the gap between costs Low Fuel Prices Add to the Fiscal Burden. and revenues. Transport's share of the implicit energy * The government is considering investing in consumption subsidy is enormous and represents a costly air traffic control system (US$ 10 billion), an even larger fiscal burden. Subsidized provision while the predicted drop in demand and slow of energy is by far the largest subsidy in Russia. recovery of air traffic would seem to argue for Its opportunity cost, measured at the market ensuring that the system is not over-designed and exchange rate, exceeds the gross domestic product that its costs are recoverable from user fees. (GDP). The subsidy is largely implicit, resulting Ideally, the entire investment should be structured from the large discrepancy between domestic not to rely on government money to subsidize the prices and the value of energy at world market investment. prices. Based on estimates of physical volumes of * The Ministry of Transportation's (MOT) energy consumed and the GDP equivalent of 1993-95 budget requests Rb7.1 billion and US$1.2 implied energy subsidies throughout the economy, billion toward the repowering of 1,500 jet aircraft transport's share of the government's implicit by 2007. Because each engine costs US$10-12 subsidy of oil energy consumption is equivalent to million, the project would cost US$18 billion. 13 percent of GDP. Similar analysis shows that Such an investment is probably unwarranted, transport's share of the implicit subsidy of given the age of the aircraft and the current electricity consumption - largely by railways, worldwide glut of aircraft. The Ministry of metros, and trams - is equivalent to 6 percent of Finance (MOF) has not included this ambitious GDP.2 Reducing subsidies and rationalizing the program in the 1993 federal investment budget, energy sector are essential to stabilizing and but a program of directed state credits for such a restructuring of Russia's entire economy and, if purpose is under discussion. implemented, will help reduce the fiscal burden of * Parliament has approved a Program for the the transport sector. Raising energy prices to Renovation of the Merchant Marine which calls world levels will thus stimulate reform of the for the acquisition of 7.7 million deadweight tons transport sector and encourage larger oil exports, (dwt) of new ships, roughly half of the current adding revenues necessary for a sustainable fiscal fleet. It is anticipated that financing will be adjustment. provided from a newly established fund consisting of hard currency earnings of the maritime fleet. Role of Transport in the Economy Given the slow growth expected for Russia's international trade, however, a maritime support Implicit subsidization of energy consumption is program may not be the best use of such hard one of the underlying reasons why the use of currency revenues. transport in the Russian economy is far greater than in other industrial economies. Russia's Existing transport assets should be used more transport system was geared to move huge efficiently, and new investments avoided unless volumes of bulk commodities among centralized required by economic restructuring. In every production facilities over long distances according element of Russia's transport system except urban to centralized and fairly rigid annual plans at 4 Overview and Recommendations prices that did not reflect the real economic cost service essential to success. Eliminating of energy. As a result, the level of transport uneconomic, obsolete, and environmentally intensity and cost to the economy is far higher harmful industrial plants and reducing transport than in most industrialized countries. movements by the defense sector will contribute to Transportation of goods was valued at 9.1 percent this change. Over time, these trends will reduce of GDP in 1990 compared to 6.3 percent in the the rail share significantly and accelerate the United States3. The difference is even more growth of road transport. In international trade, dramatic if one compares the transport ton- developments in the maritime sector are expected kilometers (tkm) per dollar equivalent of GDP. to follow broader economic development trends, According to World Bank analysis, transport ton and it might take 12 years for Russia's waterborne kilometers per unit of output in the FSU in the transport system to achieve seatrade volumes late 1980s was almost six times that of the United characteristic of the mid-1980s. States and four-and-one-half times that of China4. A shift of rail traffic to road is also inevitable, Much of the excess use of transport is by rail, particularly for time-sensitive shipments and for which carries on a tkm basis 96 percent of land short-haul rail traffic. Far more rail traffic is freight transport (excluding pipeline shipments), carried over relatively short distances in Russia compared to 50 percent in the United States and than elsewhere in the world. More than 17 percent 30 percent in western Europe. Russia's excessive of all Russian rail tonnage is carried less than 100 use of transport is not so much a function of its km. As a market economy develops and shippers vast distances as it is of the fact that organization become free to choose modes of transport, short of industrial sectors was usually not based on haul rail traffic will be highly vulnerable to minimizing costs of transport and total logistics. competition from trucking which offers door-to- door service, more flexibility, and greater Intensive use of transport will affect the reliability. These trends will reduce the share and competitiveness of Russia's industries and exports composition of rail traffic and accelerate the in the future when input, output and fuel prices inevitable growth of road traffic. Depending on reach world levels and transport tariffs reflect true the rates of overall economic growth, the economic costs. Once privatized and put on a percentage of non-energy freight carried by road competitive basis, Russia's industrial sector will transport will shift from its current 13 percent to seek to minimize transport costs and may not be between 22 and 41 percent by 2015. able to support the same long distance transport flows of bulk commodities as in the past. For Budget allocations and investment plans should example, it is uncertain whether coal from not be based on the assumption that traffic levels centrally located fields is commercially exportable will rebound. Government forecasts indicate that to either Europe or the Far East if real production transport levels will recover quickly, without and transportation costs are taken into account. much shift from rail to road. As a consequence, transport planners argue for continued investments The precipitous fall of more than 35 percent in and budgetary support almost on a business-as- freight transport traffic since 1988 reflects the usual basis. Based on experience elsewhere, such drop in overall economic activity in Russia and forecasts are too optimistic; a decline in transport presages a changing economic role. As reforms and a shift in modes is inevitable as government take hold, market forces will make the economy policies move away from a command to a mixed less transport intensive and will dramatically economy. In the course of restructuring their affect the nature and mix of commodities carried economies, for example, Central and East as well. Much of the excessive freight in basic European (CEE) countries experienced a drastic commodities will simply cease. Russia's industrial drop in rail demand. Lack of understanding that sector will seek to minimize the flow of bulk changes in the economicframework will inevitably commodities, while newly created consumer- shift transport modal shares is becoming a serious oriented businesses will turn to road transport for issue, as it is causing modal administrators to the flexible and responsive door-to-door transport develop policies and investment programs 5 Overview and Recommendations according to historical practices rather than to would allocate such resources to passenger service needs ofthefuture. he result will inevitably delay when fare levels are so far below the costs of reforns and lead to the inappropriate allocation of providing the service. Little benefit to the federal resources to the transport sector. economy accrues from such an investment, since passenger trains are already full and service is Railways subsidized, while urgently needed railway equipment, such as track maintenance machines, Railways are challenged by the inevitable switch remains unfunded. that a market system will bring in freight transport demand from rail to road. Consultants forecast The railways' present structure impedes their that demand for railway services will not recover ability to operate in a competitive, commercial, to 1989 levels until well into the next century, and customer-oriented framework. Undue while the Ministry of Railroads (MPS) forecasts a centralization by MPS and inappropriate regional sharp upturn in the near to mid term. Officials at decentralization have produced a rail monopoly the Ministry of Economy (MOE) also believe that that is difficult to control politically and when the current economic turbulence is stilled, unresponsive to shipper's quality and service railways will regain high traffic levels and a large needs. At the same time, regional railways operate freight market share. as a fragmented set of individual, entities, each Experience from around the world in similar focusing on local traffic. They have no incentive situations suggests that significant traffic will to provide adequate service to traffic that remain but routes and service needs will be quite originates or terminates off-line because they different. For example, shifts in locations and cannot control the service provided by others and quantities of coal production will significantly may not profit from their efforts. It has proven alter freight routes and volumes. The combination difficult, for example, to get the regional railways of falling demand, rising costs and reluctance to to respond consistently to an MPS commitment raise passenger tariffs is causing the traditionally for Trans-Siberian container trains to be run non- profitable railway system to incur skyrocketing stop coast to coast. This demonstrates how deficits. By late 1992, that deficit was at an difficult it may be to increase containerized freight annualized level of Rb75 billion, and for the first movements in the near to medium term. time in years the government found it necessary to subsidize rail transport. These losses are evidence Dissolution of the FSU has had an extremely that fundamental reform is necessary and that the deleterious effect on theformerly all-union railway railways need to become more commercially system. The breakup has hurt rail operations as oriented, lower their costs, organize their services well as in such critical managerial functions as more appropriately, and develop corresponding rate setting, revenue division and carriage investment plans. Instead, MPS has hired management. Traffic levels and patterns have been additional workers and its capital plans still focus disrupted, new borders have delayed transit times, on constructing employee housing, expanding the and inter-railway interchanges have increased network, continuing electrification, and even to dramatically as an enormous amount of traffic that promoting a high speed rail line with no chance of was formerly single-line traffic must now cross financial viability. two or more systems, each with its inevitable Other investments concentrate on improving delay and processing time. The railway has also passenger service at the very time losses are been deeply affected by disruptions in equipment increasing. The railways' request for foreign supplies. Disintegration has led to the allocation of exchange credits to purchase a US$200 million rolling stock and containers among republics, and computerized passenger reservation system, in arguments have developed over how to divide particular, could be questioned, given the current revenues and charge demurrage. Other republics fiscal situation. While such a system may make increasingly complain about sending rolling stock sense in the future, less costly systems are into the "black hole" of Russia. Given so many available and one questions why the railways uncertainties over the future form of railway 6 Overview and Recomnnendations management structures, there are no immediate intra-rail competition by combining and then prospects for resolution. redividing regional railways so there is direct competition among them. Except for some areas Overstaffing and ancillary activities contribute of the country, this restructuring would enable the to operating deficits and provide scope for government to limit regulation of railway prices improved productivity. The Russian railway and service levels to a large extent. While there is system employs 2.24 million people. About 1.6 no single or simple approach to creating intra-rail million are engaged in railway operations; nearly competition, it is possible, for example, to (a) 500,000 in schools, hospitals and restaurants; and structure parallel-line competition from Lake another 200,000 in industrial activities. These Baikal to Moscow and the western borders; (b) ancillary activities eventually should be privatized make the Eastern Siberia, TransBaikal and Far or separated operationally and financially East railways into bridge carriers jointly owned by wherever possible. World Bank analysis shows competing carriers west of Lake Baikal, ultimately that labor productivity on the Russian railways is yielding intrarail competition over the entire route somewhat less half of U.S. railways, which are from Europe to Asia; and, (c) grant the Moscow comparable in size and traffic levels to the railway trackage rights of the October Railway to Russian system. While it would probably be St. Petersburg and the Finnish border to create uneconomic for Russia to attain equivalent competition in this vital market. (These are only productivity figures it should certainly be possible examples: a great deal of study is needed before for MPS to operate its freight service with at least any decision is made about restructuring freight 20 percent - roughly 200,000 - fewer employees. activities.) Russia's railway system needs restructuring to Problems afflicting every mode of Russia's become financially viable and customer oriented transport system make it difficult to achieve the for thefuture market economy. Russia's problems integration and cooperation needed to stimulate will not solve themselves. The government needs growth of an effective container system. One to initiate a restructuring effort or otherwise risk: factor affecting the economy and distribution of - Further erosion in rail transport service, Russia's international transport is the low level of with its attendant higher cost. containerization. A report undertaken for the * Possible predatory behavior on the part of European Bank for Reconstruction and the railway as it attempts to defend its market Development (EBRD) estimates that position. containerization in transport is approximately one- - Continued large, unsustainable deficits fifth of the average level prevailing in which pose a serious macroeconomic challenge for international trade.' Efforts to impose an the overall economy. intermodal system on top of the current disorganization of the transport system are not To restructure the railway system, the likely to succeed, and the lack of a healthy and government's strategy should begin with two growing container-based transport systemfor both broad efforts: international and domestic trade will present * Separate the intercity (long-term) and physical and economic barriers to the growth of suburban passenger (near-term) services from Russia's international commerce. freight, provide them with clear and direct sources of performance-based public subsidies where Trucking essential, and end their cross-subsidy by freight revenues. The immediate establishment of a competitive and * Corporatize and commercialize the privatized trucking industry is essential to environment in which rail freight services are overcoming Russia's otherwise rigid and offered and operated. unresponsive transport and logistics system. Slow In the longer term, the government may action in this key policy reform will hinder the consider restructuring the railway system to create rapid and effective transition to a market-based 7 Overview and Recommendations e economy and act as a brake on economic growth. enterprises that specify obsolete rates Privatizing and eliminating monopolies in the for- inappropriate to a free market should also be hire trucking industry are moving slowly, abolished. MOT officials indicate that such although most enterprises have submitted contracts may affect as much as 80 percent of for- applications to privatize. There is some evidence hire traffic. These contracts should be replaced by that the government is reluctant to press forward new, freely negotiated contracts that recognize full with eliminating trucking monopolies and assuring cost levels, account for demand and carrier that no firms are given geographic or commodity performance, and provide adjustments for specific monopolies. Except in small rural areas, inflation. the government should require that bus and truck operations are privatized into separate firms, since Highways the two are essentially incompatible on an operational and financial basis. To make the 7he expected growth in road transport traffic will industry more competitive and ensure that barriers put heavy demands on the road system. The share to entry are minimized, the government should of road traffic for non-energy transport could offer incentives allowing enterprises to auction off approach 41 percent in twenty years, compared to portions of their fleets to private individuals as the present level of 13 percent. If just 10 percent part of the privatization process. This will foster of the tkm now carried by rail is diverted to the the entry of new trucking firms, since new foreign intercity trucking industry, the level of truck and domestic trucks cost too much for most new traffic on Russia's roads will double, causing businesses. New entrants should also be created more than twice the road wear since an estimated by privatizing vehicles owned by Agroprom and 20 to 30 percent of trucks are more heavily loaded by permitting these and trucks owned by industrial than the 6.5-ton per axle load for which most firms to compete with those in the for-hire Russian roads are designed. In terms of wear and industry so as to ensure enough through capacity tear on the vehicle fleet, estimates of the economic for new business entrepreneurs. Government cost of not taking immediate measures to improve should also act to improve the environment for road and highway conditions on the 1,350 private, independent trucking firms by ensuring kilometers of the highest priority roads in the first that auxiliary services such as fuel, servicing, and year of deferred maintenance could amount to maintenance are available to all road users. US$250 million, with exponential increases in the Competition should also be fostered by ending following three years. existing geographic and commodity-based monopolies, by eliminating control over empty Deterioration of the highway network, from a movements, and by eliminating tariff restrictions. growing backlog of deferred maintenance, could result in a complete pavement failure if not Continued government influence over trucking corrected soon. Reduced funding for maintenance rates and contracts threatens trucking reform. One has meant poor quality of construction and very serious problem impeding the development of rehabilitation, inadequate maintenance, and poor a market-responsive trucking industry is quality of bituminous material used in road government regulation of rates. Recent reports construction. At least 38 percent of the trunk road conflict about whether or not trucking rates are system requires rehabilitation or reconstruction; still regulated and, if so, at what level of another 25 percent is in fair condition and requires government. Rate regulation should be removed at thick overlays. The total cost of restoring these all levels to ensure rapid development and roads to good condition could amount to US$4.5 efficient growth of a competitive trucking billion (at world prices). If roads are not industry. There are some indications that oblast strengthened soon, there is a high risk of complete governments are moving toward regulation of pavement failure, which would increase rates in a manner that would restrict the free restoration costs by at least 50 percent. An equally movement of goods among and within oblasts. serious situation exists with the 60,000 bridges on The old haulage contracts for government the federal road network, more than a third of 8 Overview and Recommendations which are in poor condition. The problem of of the transit fleet, while instituting reforms that deferred maintenance is important in its own right will make the enterprises more operationally and but particularly important given the expected financially productive. Russia's urban public growth in road traffic as shippers choose to move transport has historically had 70 percent of its high-value freight from rail to road. costs covered by subsidies. The 85 percent of the population using the system should improve cost Without reforms and additional financing, the recovery by paying fares that support a higher highway sector will not be able to respond to the percentage of the costs. In many areas, completely challenge of preventing the collapse of Russia's self-supporting private transit services, perhaps road infrastructure. The government has created using microbuses or other non-standard vehicles, a number of "concerns" or companies to replace could be established. the construction and maintenance organizations previously in MOT, but lack of funding may Maritime prevent the concerns from evolving into a sustainable, privatized, domestic contracting The effective implementation of the government's industry. excellent policy of Maritime Reform and Port Privatization has broken the monopoly between The need to preserve the highway network is so ports and ocean carriers, dramatically reduced critical that the government should consider governmentfiscal liabilityformaritime operations, externalfinancing to implement road rehabilitation and set the stage for an effective program of projects that cannot wait until a road funding restructuring and privatization of shipping lines mechanism is satisfactorily implemented. Such and national ports. In January 1991, Russia's financing could be organized to help improve the seaports were organizationally separated from quality of road rehabilitation works by attracting national carriers as a first step toward experienced international firms to collaborate with restructuring the maritime and port sectors. This Russian contractors to undertake civil works major policy decision was an essential prologue to contracts. In this way, privatization of road the application of the basic policy objectives that construction concerns could be achieved and a must be achieved if Russia's ports are to be sustainable domestic road contracting industry effectively restructured: launched. Such financing is vital to Russia's economic recovery and is in the process of * Private participation, which is essential to working with the government to implement such the creation of effective competition. a project. * Maximum freedom from regulatory restraints, without which ports and carriers cannot Urban Public Transport respond effectively to the marketplace. * Decentralization, which not only prevents Urban public transport is essential to the economy the central government from exercising and vital to the mobility of the population, but bureaucratic authority over economic decisions, there is simply not enough money to operate or but also prevents dominant political groups within maintain the urban public transport system as carriers and ports from forcing non-economic presently structured. Public transport entities are agendas into business operations. experiencing a general decline in financial * An anti-monopoly policy, which ensures that conditions caused by low fares, rapid increases in economic competition exists and prevents the costs, increasingly limited subsidies from local transfer of a public sector monopoly to private governments, and high levels of passenger fare interests. evasion. These financial straits lead to under- * A public sector agency with the specific investment in, and deferred maintenance of, aging mandate to preserve market freedom through equipment. The government's strategy should deregulation and anti-monopoly powers. concentrate on finding practicable and affordable * Financial responsibility by eliminating solutions to stem the rapid physical deterioration access to subsidies. 9 Overview and Recommendations Restructuring Ports. Separating shipping lines channels - and lease them on a long term basis to from ports enabled MOT to develop a plan for private operators. To accelerate the restructuring, rationalizing and restructuring the port system. it is recommended that the government not finance Through this process, Russia's ten largest and any port investments nor give sovereign most diversified ports, which handle most of the guarantees on loans to port authorities or international seatrade, were designated on enterprises in the absence of a financially viable September 30, 1992, as being of national plan for a competitive restructuring of the port. importance and classified as category I ports to be The strategy should also develop a "port privatized. Another 21 ports, most of which are in authority" mechanism to be landlord for state- the Far East, were considered of regional owned assets, to represent the public role in the importance and classified as category II. Ten national ports system, and to ensure that the small ports were classified as category III. The contract operators of ports facilities meet their government is planning to transfer all ports in financial obligations and provide good service to categories II and III to regional or local the world's maritime industry. To this end, the jurisdiction. government's port privatization process, as modified by directives of November 1992 and The need exists for a national port strategy. The early 1993, provides for the establishment of a restructuring and privatization of national ports maritime port administration to serve as the public should be done in as competitive a manner as steward of each national port. The port authority's possible to enhance competition among them. To board would be the agent for the creation of the achieve this goal, Russia needs a national ports port's privatization plan. In assisting with this strategy that serves as a blueprint for an restructuring, any framework for analysis or institutional framework to manage port physical strategy developed by the government for dealing assets, and for a regulatory framework within with its national ports should not promote which the public's interest in preserving the continued control by central authorities of day-to- physical assets and obtaining efficient port day matters ofport operations and administration. operations can and should be protected. The Nonetheless, the government will have to be strategy should work within the decree on port involved in organizing the institutionalframework privatization from the Ministry of Transport for managing the ports' physical assets, for (MOT) and the Committee for Management of developing a regulatory framework within which State Property (GKI). This decree calls for these ports will operate, and for maintaining - retaining real estate and infrastructure ownership through the port authorities - an appropriate in the state providing for private operations - permanent public role in the ownership and use of including labor and management participation in vital national port infrastructure. ownership of the operating companies - within a planned, competitively-structured framework. Proposed National Port Development Program, There are pressures for the government to based on a strategy of self-sufficiency, is extremely modify this directive and permit privatization of costly and should be weighed against economic ports under option 2, by which 51 percent of the considerations. While accepting the inevitable stock could be owned by labor and management, decline in annual seatrade through the mid 1990s, with state ownership limited to 20 percent. the government's National Ports Development Whichever option is selected, port privatization Plan calls for building new ports to boost the should take into account a principle that is annual cargo handling capacity of the system from paramount and that is reflected in the 165 million tons to 240 million tons by the year government's privatization law, as modified by 2000. This would fully replace port capacity lost decrees issued in September 1992, November to the Baltics and Ukraine, and would expand port 1992, and January 1993: the government should capacity in the Far East in line with expectations retain ownership of the strategic physical of future trade growth with Pacific Rim countries. infrastructure and port real estate - including The entire program is expected to cost about breakwaters, quay walls, and navigable approach US$3.6 billion (1991 prices) over the next ten 10 Overview and Recommendations years, to be carried out in three phases. The business. All direct state subsidies were economic rationale for self-sufficiency, however, terminated, except those to lines serving remote is questionable, even if currently prevailing facilities in the Arctic and the Far East. The political imponderables are taken into account. shipping lines are in the process of being * Present and projected traffic levels are so privatized. Once privatized, it is important for the much lower than before the break-up that many of govermnent to phase out the worldwide provision the efforts to replace "lost" general port capacity of bunker fuel to Russian merchant ships at may be unnecessary. Grain imports have dropped subsidized prices in local currency. Otherwise significantly due to good harvests and pricing these companies will be able to earn foreign reforms, and are expected to be 14 million tons in currency while paying virtually all their operating 1993, compared to about 25 million tons in 1992. costs in subsidized rubles. * Because current levels of utilization in the remaining ports are estimated at only about 60 Proposals to buy new merchant ships should be percent and productivity in terms of cargo resisted. The government has recently issued a handling is quite low, much of the lost capacity decree to acquire or build additional merchant can be recovered by making Russian ports as marine ships to replace those lost to other efficient as those in market economies. republics following the break-up of the USSR. * Although replacing selected specialized The government should resist financing such facilities in other FSU countries may be proposals because the worldwide glut of merchant rationalized for reasons of national security, the shipping capacity makes purchase of new vessels costs and benefits of making the investment in much more expensive than purchasing merchant Russia should be carefully evaluated and marine services on the international market. compared with opportunities for joint ventures or Government subsidy for the acquisition of new special contracts with ports in neighboring ships is also inappropriate, given the announced republics, at rates beneficial to both countries. policy of merchant marine privatization. i If new port facilities are built in Russia, a private, competitive freight forwarding industry Airlines might choose not to use them, since it is possible that the cheapest option will be to use existing 7he structure of the aviation system is in question; ports in neighboring republics or to ship by land airline losses are mounting and becoming an to European ports.6 This is particularly so because increasing drain on the federal budget. The the investment in ports already built can be demand for air travel has fallen substantially and viewed as a "sunk cost", and port tariffs need is likely to fall even further as more subsidies are only cover long-range operating costs. If new removed. While lessening the pressure on the ports are built, rates will have to cover the full carrying capacity the aviation system, decreased investment as well as long range operating costs demand has exacerbated financial problems and unless the government is prepared to subsidize the made more urgent the need for the government to entire effort. devise and implement an effective aviation * The costs of adding new port facilities must strategy that will: also compete with (a) the need to protect and * Continue to pursue its initial policy of preserve existing breakwaters and quay walls in separating the basic elements of the aviation ports which are apparently in some jeopardy due system - airports, airlines, and the air traffic to lack of maintenance in the past, and (b) the control system - and making them operationally need to resolve land-side constraints and introduce and financially independent to the greatest possible intermediate storage to remedy operational extent. difficulties. * Resist pressures to subsidize airline losses and gradually end fuel subsidies. Fuel subsidies should be eliminated. In January * Identify the appropriate role and level of 1991 the shipping lines were corporatized and government involvement in each element of the permitted to compete with one another for system, whether it is ownership - federal control 11 Overview and Recommendations of the air traffic control system or local example, the average annual vehicle utilization in government control of airports - or regulation - common carrier trucking fleets is on the order of federal control of system operations, safety, and 52,000 km, while privately owned vehicles would fares in situations where there is no competition. average at least 80,000 km annually. If the * Redesign the structure of the airline industry available truck fleet averaged 80,000 kilometers a and facilitate privatization through a graduated year as a result of the industry's being fully process. privatized and deregulated, the gain in capacity * Ensure that federal support for new aircraft, would be equivalent to the purchase of more than retrofitting existing aircraft, airport construction 56,000 trucks based on projected demand level and expansion, and other major capital projects is and fleet size for 1995. In the event of shortage, repaid by the newly privatized companies for surplus industry and military trucks can be used. whom such investments are being made. Another example is the extremely low utilization There is no single right answer to structuring of rates of cargo handling equipment in Russian the airline industry. An effective solution would ports, which undoubtedly would improve with be to encourage all airlines that want to become privatization and offset the need for costly new self-sufficient (there were 174 in June 1993) port capacity. That lack of capacity will not be a compete in all markets, then allow mergers and problem is fortuitous, since major, permanent consolidations to take place as the market dictates. changes in the transport system's role are coming. The government should ensure that more than one airline is formed and that competition among Russian transport vehicles and equipment are airlines is encouraged and facilitated. technologically obsolete, fuel-inefficient, and Restructuring the airline sector should be generally inadequate to the market served. undertaken with the understanding that capacity Russian manufacturing processes need modern issues - numbers of airports and aircraft - will technology to cope with increasingly demanding be far less an issue than rationalizing facilities requirements. When the economy rebounds, and enterprises. Such rationalization should be transport operators will need to produce more guided by the marketplace, with government transport service with less - but better - transport investment and subsidy kept to a minimwn. equipment. Fuel efficiency is a major concern in Airports should be supported by concessions for this regard, since current transport fleets lag shops and parking, and by landing fees; airlines significantly behind the rest of the world and should be supported by passenger and freight inefficient trucks will drive up the cost of revenues. transport intolerably once fuel costs reach world market levels. For example, if Russian diesel General locomotives are brought to world levels, Russia could save up to one billion gallons in fuel, or Transport capacity is not likely to be an issuefor US$1.0 billion assuming a price of US$1 per transport entities in Russia for years. Transport gallon. demand is so low that it can be met with existing Russia's diesel truck engines are also infrastructure and equipment, even though much technologically obsolete and inadequate for the of it is in poor repair, out of service from lack of country's needs. The fire at the Kamaz factory in spare parts, not suited to its intended use, or in Tartarstan provides an opportunity to deal need of modernization. Except for railways, much effectively with this problem. Improving the diesel of Russia's transport equipment and infrastructure engines in Russia's trucks could cut their fuel is dramatically under-utilized by world standards. consumption by as much as 30 percent. At world Achieving greater levels of productivity with oil prices, this is a significant opportunity cost in existing equipment is easily possible despite its lost foreign exchange. Present domestic transport age, provided it is operated in a competitive equipment technologies are simply not capable of private sector environment; doing so is equivalent meeting these demands. The strategy for meeting to purchasing additional capacity at no cost. For these needs depends, in the mid to long-term, on 12 Overview and Recommendations an effective process for integrating critical industry is the quickest and most effective way to elements of foreign technology into Russia's create the demand that will cause manufacturers to domestic manufacturing processes. Foreign firms produce the small and very large trucks that are in entering the Russian market should be able to take shortest supply in Russia. Only when trucking a long-term view and be capable of withstanding operators and other enterprises that buy and losses in the early stages of their ventures. operate their own trucks demand significant numbers of these types of trucks will Russia's transport equipment is unsuitable for manufacturers begin to produce them. When the marketplace. Russia's truck fleet lacks small trucking operates in a private, deregulated and and very large trucks. In the World Bank's view, competitive framework, truck purchasers will be restructuring the truck and engine manufacturers much more likely to have the capital to buy such and privatizing and deregulating the trucking trucks. 13 Overview and Recommendations Recommended Strategies Matrix Railways Near term (1 year or less) * Preserve key parts of the existing rail network that are jeopardized by inadequate maintenance and the disruption in the supply of spare parts and equipment because of the breakup of the FSU and by the railway's increasing financial difficulties. * Take steps to limit operating losses and strengthen financial performance of the railways, to reduce the railway sector's fiscal impact on the national budget. * Take immediate measures to curtail suburban passenger losses. * Allow freight rates to rise to cover cost increases from inflation. * Reverse investment priorities to meet urgent needs by (a) deferring or eliminating projects with low rates of return, and (b) ensuring that projects related to improving rail operations under a command economy will have a commercial application in a market-based economy. * Heighten awareness of the changing nature of transport demand and the consequent need to develop long-range views of the railway's role in a market-driven economy. Medium term (I to 3 years) * Start adapting the structure of the railway to the needs of the emerging transport markets in Russia. * Establish a labor redundancy program to ameliorate the effect of anticipated unemployment. * Review the structure and function of intercity rail passenger services to determine if they should be maintained as part of an integrated rail enterprise or established as a separate operating and financial entity. * Improve the quality of equipment maintenance. * Lay the groundwork for developing a competitive, private sector industry for repowering and overhauling diesel locomotives. * Privatize ancillary activities and separate them operationally and financially. * Devolve the operating and financial responsibility for suburban rail commuter services to municipalities. * Devise a plan and an administration for the smooth introduction and operation of modern wagon and container tracking system. * Assess and address environmental problems. Long term (more than 3 years) * Introduce a modern wagon tracking system. * Upgrade telecommunications. * Contract out routine maintenance activities. * Implement changes needed to create intra-rail freight competition, where appropriate, and to regulate railway market power where competition is not sufficient to govern prices and service levels. 14 Overview and Recommendations Recommended Strategies Matrix Road Transpoil Near term (I year or less) * Complete privatization of road transport enterprises under a modified directive that encourages auctioning a substantial portion of the fleet as rapidly as possible. * Improve competitive structure by permitting easy entry of new trucking operators: Agroprom, other own-account truckers, freight forwarders, etc. * Remove or eliminate any geographic or commodity-specific monopolies or other restrictions on effective and efficient operations. * Maintain present policy against federal rate regulation. * Privatize and de-monopolize auxiliary services. * End any MOT or other government-sponsored program of subsidized financial assistance, including leasing, for acquiring trucks. * To support development of a private trucking industry, the government should lease surplus military or other facilities that can be used as terminals or warehouses. Medium term (I to 3 years) * Formalize and expand the program of de-monopolizing the provision of auxiliary services by offering concessions to operate facilities for fuel, spare parts, maintenance, food and lodging along major intercity highways. e Develop or adapt training manuals and computer software for Russian trucking firms to aid them in such areas as maintenance, operations planning, bookkeeping and marketing. 3 Coordinate and implement night-time driving safety measures. 3 Reform the allocation of international trucking operating certificates now handled through a non- governmental body, ASMAP. * Develop a body of vehicle licensing and operating specifications that will not impair the most economical and efficient use of the existing truck fleet or raise the cost of new trucks to uneconomic levels. * Stop providing terminal and warehouse facilities either through privatization of facilities provided under the stop-gap program or cancellation of existing leases. Long term (more than 3 years) * Develop an appropriate set of safety and environmental standards for trucks. 15 Overview and Recommendations Recommended Strategies Matrix Urban Public Transport Near term (I year or less) * Implement emergency measures to maintain service levels. * Formulate a short-term strategy for keeping the existing urban transport fleet operating. * Develop new specifications for buses suitable to the Russian climatic, service, and operating environment. * Define and reach consensus on the basic elements of a reform package for the provision, financing, and management of urban public transport. Medium term (f to 3 years) * Ensure that the preconditions for effective manufacturing of new urban transport equipment in Russia are in place. * Implement the reform package to improve the financial and operating performance of urban public transport. * Refine specifications for improved urban transport equipment. Long term (more than 3 years) * Privatize intercity buses. * Complete devolution of transit to municipal or local level. * Promote manufacturing of improved urban transport vehicles through licensing and joint ventures. * End parastatal operations; maximize private provision of urban transport services through contracts with private corporations. 16 Overview and Recommendations Recommended Strategies Matrix Roads and Highways Near term (1 year or less) * Preserve existing road network. * Ensure adequate funding for road rehabilitation and maintenance. * Obtain external financing for road rehabilitation. * Give priority to road maintenance rather than road construction. * Improve the quality of road maintenance works. * Develop an economic road maintenance strategy. * Review the administrative structure of the highway subsector. * Strengthen the capacity of FHD. * Determine the role of avtodors. * Establish a competitive road contracting industry. * Introduce competitive bidding for road works. * Introduce a contract management and supervision system. * Establish a traffic count system. Medium term (I to 3 years) * Improve highway subsector planning and evaluation of projects. * Design and implement a bridge rehabilitation program. - Review the classification and maintenance of non-public roads. - Review and revise road design standards. * Monitor axle loads on roads built to six ton standards. * Enhance training of highway subsector staff. * Design and implement a road safety program. Long term (more than 3 years) * Clear federal road maintenance backlog. * Increase road capacity. * Develop axle load regulations. * Contract out routine maintenance activities. 17 Overview and Recommendations Recommended Strategies Matrix Waterborne Transport: Port Sector Near term (I year or less) * Preserve critical operating capabilities in Russian ports. * Take measures to reduce the dependency of port operations on the availability of rail cars at quayside for unloading and loading of ships. * Make plans to restructure road and rail access facilities to critical port installations and assess investment costs for these improvements. * Take measures to ensure self-sufficiency of national ports and to eliminate the government's centralized fixing of port tariffs wherever there is effective competition. * Permit ports to refuse service to non-paying customers and to auction unclaimed cargo to clear backlogs. * Reaffirm port privatization policies and launch assistance efforts to help ports implement them, including provision for maritime port authorities to own port infrastructure (such as quays, breakwaters and navigational channels) remaining in state ownership. * Reassess the national port investment plan and limit any government support of port investments to those justified with cost/benefit analyses and to those undertaken in the context of port specific corporatization, privatization, or restructuring plans with loan agreements structured appropriately between port and government. e Establish policies for devolving responsibility for the planning, construction and financing of ports to local authorities. Medium term (I to 3 years) * Enhance MOT's capacity to undertake economic and environmental assessments of proposed port investments. * Begin implementing port privatization plans as developed and approved by ports, GKI, MOT, and newly created Port Authorities. * Assist MOT to revise the legal and regulatory framework in the port sector in conjunction with privatization plans. * Assist ports in restructuring and privatizing ancillary activities. * Assist ports in establishing a safety net for managing staff redundancies. Long term (more than 3 years) * Complete the restructuring of the port sector and continue to lay groundwork for development of a competitive private sector. * Introduce competitive bidding for the provision of maritime and port service to low density northern zones. 18 Overview and Recommendations Recommended Strategies Matrix Waterborne Transport: Maritime and River Shipping Lines Near term (I year or less) * Corporatize, cut managerial links with government and put all maritime and river carriers on a commercial footing. * Permit carriers - in appropriate situations - to diversify into related services such as freight forwarding, trucking, and warehousing. Medium term (I to 3 years) * Deregulate river and maritime transport: abolish tariff regulation except in cases of monopoly or where subsidies are necessary; ease entry and exit restrictions. * Let the marketplace allocate maritime capacity. Foster development of transport competition by promoting competition among the several river shipping lines, the several maritime shipping lines, and Russian and nearby foreign ports. 19 Overview and Recommendations Recommended Strategies Matrix Civil Aviation Near term (I year or less) * Continue efforts to reduce the airline sector's negative fiscal impact. * Ensure that the government fully compensates airlines for provision of services to the state for governmental business or social purposes. * Encourage airlines to restrict extensions of credit for airline service to state enterprises. * Take steps to upgrade the clearinghouse for inter-airline settlements, so that it can offer prompt and accurate payments in accordance with clear and agreed accounting practices and standards and ensure that the clearinghouse agency is independently owned and operated. * The government should reduce and terminate where possible programs that finance investments, including building new airports, acquisition or re-engining of aircraft, or introducing an air reservation system for privatized airline companies. * Develop within MOT the capability to analyze the financial and operational performance of Russia's domestic and international airlines and the ATC system; develop appropriate policies for the structure and operation of a private, competitive, financially self-sustaining aviation system. * In the context of privatizing airports, ensure that each airport offers its services on an equal basis to all carriers. * Ensure that newly privatized airline operations are permitted to compete with each other in the same markets and, as time goes by, to merge and rationalize themselves as market forces dictate. * In privatizing or corporatizing Aeroflot enterprises involved in international aviation, dissolve the Production and Commercial Association and privatize its individual entities in a way that breaks the ownership linkages of airline and airport and enhances competition. 3 Prepare a strategy for how to divide Aeroflot's international operations and international assets among CIS countries that wish to have their own international airline. - Restructure and federalize activities of MAK that are appropriate governmental functions. 3 Privatize airport construction companies and ensure that any airport construction is contracted through competitive bidding. i Assess safety performance of the airline and aviation system and develop near-term action program to alleviate critical deficiencies. Medium term (I to 3 years) * Continue restructuring the airline sector. * Complete the separation of the ATC system from Aeroflot and structure an appropriate system of charges to finance the upgrading of its operation and improvement. * Establish capability within MOT to promulgate operational and maintenance standards for the airline and aviation system. * Establish an independent agency to investigate air accidents and incidents and to recommend to government appropriate remedial actions. * Establish policies for devolving responsibility for planning, construction and financing airports to local authorities in a manner that assures that any federal financing of airports is based on user charges and made available on the basis of equitable apportionment principles. * Introduce competitive bidding for the provision of airline service to low density northern zones. 20 Overview and Recommendations Notes Trucking Trends (1991-92 edition), gross freight revenues in the trucking industry in the U.S. 1. Looking at the rail mode in particular, U.S. totalled US$272 billion in 1990, representing 78 experience demonstrates that making the railway percent of the nation's freight bill and 4.9 percent more directly responsive to market needs brings of GDP. Accordingly, total transport expenses dramatic change. U.S. railway labor productivity amounted to US$349 billion and represented 6.3 trends, which had roughly paralleled those of the percent of GDP. Comparisons are difficult to FSU, improved much more quickly than in the make because of the heavy distortions in prices USSR after the deregulation and restructuring of throughout the economy compared to the United bankrupt railways. In fact, improvement was so States. powerful that railway profits and investment are at their highest levels, even though average freight 4. Sources: (a) World Bank Development Report revenue per tkm has actually fallen (in constant as 1991, Table 30; (b) L.W. International Financial well as current dollars) every year since 1982. Research, Inc., [Bulgaria, Czechoslovakia]; (c) Similar pressures and trends would be felt in 7he Economist, January 12, 1991, p 65 (FSU). Russia if the appropriate competitive and regulatory regimes can be implemented. 5. Booz-Allen & Hamilton/Travers Morgan. EBRD Railway Sector Survey of the Railvvays of 2. Calculations of the levels of implicit energy Russia, Ukraine, Belarus, and Kazakhstan, subsidies are clearly very sensitive to the London: July 1992, p 20. exchange rate used in the analysis. The magnitude of energy subsidies was also calculated using a 6. The government should leave these decisions simulated exchange rate of Rb9I/US$l proposed to the marketplace, a development made possible by the Research Institute on Prices of the Russian by its laudable decision to privatize freight Ministry of Economy. Using this exchange rate, forwarding. Exports may generate more foreign transport's share of the government's implicit currency for Russia if, for example, enterprises subsidy of oil energy consumption was equivalent were to ship products by land to ports in Europe, to 11 percent, and its share of the government's where there are more international carriers implicit subsidy to electricity was 2.5 percent. available to carry goods worldwide more quickly and cheaply than to insist that all Russian goods be shipped in Russian ships through Russian ports. 3. Russian Economic Reform, Crossing the It would be unfortunate if government's recent Threshold of Structural Change, A World Bank drive to re-centralize control of exports were to Country Study, August 1992. Table 2-3: Gross undercut the development of what can, and Domestic Product by Industrial Origin at Current should, be a thriving and competitive private Prices, 1989-90. According to ATA's American industry. 21 Economic and Financial Performance of Russia's Transport System Geographic and Economic Setting approximately 20 percent.2 The government has reasserted its intention to press forward with The Russian Federation, with a land area of 17.1 reforms but is now moving more slowly than million square kilometers, is by far the largest expected on privatization and enterprise reform country in the world, stretching across 11 time efforts. It has acceded to pressures to extend zones. The country is characterized by three credit to financially distressed state enterprises in distinct geoclimatic regions: the steppe, the taiga, an effort to postpone unemployment. The and the tundra. The steppe, a band of territory consolidated fiscal deficit at the end of 1992 was west of the Ural mountains with most of Russia's estimated to be in excess of GDP despite measures arable land, is where the bulk of agriculture and to reduce government expenditures and subsidies industry is located, and where 78 percent of the and to introduce new value-added and excise people live. The taiga, a thickly forested zone, taxes. The economic situation will be difficult for and the tundra in the extreme north, cover 67 some time; the most optimistic prognoses for 1993 percent of Russia; most of the country's energy indicate that industrial output will continue to fall reserves and other natural resources are located in by 7 to 10 percent. The general economic decline, these regions. Russia is divided into 88 compounded by shifts in production, and rapid administrative-territorial divisions: autonomous inflation, are having an immense effect on the republics with their own parliaments; krais, which transport sector in terms of demand and supply of have considerable autonomy; oblasts or states; and essential spare parts and replacement vehicles. other administrative districts. Russia has embarked upon a program of Sector Background economic reform with a view toward creating a market economy that can become increasingly Russia's internal surface transport system includes integrated into the world economy. The process of a vast network of railways, roads, pipelines, and transition from a command economy to a market- inland waterways, much of which is west of the based one has been initiated under difficult Urals. Extensive rail and pipeline networks also economic circumstances, with the added serve the main industrial areas in Siberia and complication that the society is also trying to extend across the southern third of the country to establish new philosophical, political and the eastern coast over permafrost and through administrative structures. The result of these other harsh climatic conditions. Because much of changes in 1991 was a decline in output of 9 its population is urbanized and private ownership percent, with inflation of 142 percent in retail of cars has been discouraged, Russia has one of prices and 236 percent in wholesale prices.' the world's largest public transport fleets. Despite Despite some efforts to liberalize prices and its enormous land mass and extensive coastlines, stabilize the economy, it is estimated that Russia now has relatively few maritime ports, the industrial output for 1992 as a whole fell by result of geographic, demographic, and climatic 23 C'hapter I Exhibit 1.1 Russian Freight Transport Task, 1992 Estimates (billions of tkm) Est Mods 1970 1980 1985 1986 1987 1988 1989 1990 1991 1992 All Traffic 2,o45 4.4S6 4.748 5.002 5.053 5,117 5,014 4,794 4,388 4,236 including General Purpose 2.523 4,232 4.502 4.74b 4.791 4.844 4,731 4,509 4,104 3,800 Railway 1.706 2,362 2.554 2.632 2.631 2,659 2,611 2,526 2,362 2,250 including General Purpose 1.672 2,316 2,506 2.585 2.581 2,606 2,557 2,479 2,319 2,150 Road 116 241 265 275 277 287 295 300 290 263 including General Purpose* 32 67 71 70 70 71 71 68 64 59 including Rosavtotrans** 29 63 67 66 66 67 62 58 55 51 including Own Account 84 174 194 205 207 216 224 232 235 204 River 16S 232 248 241 240 237 226 220 200 183 including General Purpose 164 228 243 237 235 233 221 214 195 181 Sea 412 534 503 520 524 539 531 508 470 470 Pipelines 243 1.087 1.179 1.334 1.381 1,395 1,351 1,240 1,057 1,070 Includes international,intracity,intercity "Without Mosavtotrmna and St. Petersburgavtotrans. As f 1993. 'Rosavtotrans' will be a Russian joint stock trucking company. Russian Freight Transport Task, 1985 to 1992 General Purpose Cargo billions of tkmn . . I......: ..... 5,000- S< Ii H-- * Ilxl~2'.i N . Mq.: Hii ll ,r i H i. SNi1 ... ......... S...:j 22, 2222i 35~ ~ ~ ~~~~~~~~~~LiiiiiH3 1t9iiiiiis3ui@*ii :i'Hi*iiiiH 2'iiiii6|2iiiiii*iH 2:iiH iitri l* il H S i*i,,iii*tliHiiSiisiiiiiXi,zi**iffl! i 1. , i-*iU iMe-i iSSiisiiiiiHiB%iiiiiHiiiiiiili5HIiiiiIiiiiiiiViiiBiiiiitliIHiglitliiiii ibEi:*iiijiii iiil_iiii.,ii 3 ,000 - b - ˘ @H H . 93HiigH*iHHiii;~~~~~~~~~~: S iiiHiiigig!HH33ii:r 2,500-= 2,000 1,500-; ° ;~~~~~~~~~~~~~~ .! 86. ::N N6H 3500 H .H!........ 1989 1990 1991 ~1992 DIII Truck I] River * Sea -. Pipeline R* Rai All Modes3 SOURCE: Ministry of Transport, RF, 4 November 1992 24 Chapter I conditions and the loss of more than half its port haul for road transport are much greater - over capacity to other republics following the break-up 500 km in the United States. A well-developed of the USSR. The break-up has also seriously pipeline system transports more than 1 trillion tkm disrupted the railways and airlines. of petroleum products annually, representing about 25 percent of total freight. Freight Transport. Given the long distances within the country, and the number of bulk Passenger Transport. Passenger transport in shippers with annual production plans serving as Russia is supplied primarily by public enterprises, a basis for pre-planning movements, long and with rail providing the largest share of intercity medium distance freight transport relied primarily and suburban transport and a variety of buses, on the railway, and to a far lesser extent on inland trams, trolleys, and metros providing urban waterways (exhibit 1.1). Road transport was used transport. Overall, passenger travel in Russia is primarily for short trips as a feeder to the railway dominated by short-distance bus travel. Russia is and for distribution of goods within urban areas. a highly urbanized country, with 70 to 75 percent As a result, the railway system is the most of the population living in cities. Its urban public intensively operated in the world, carrying about transport fleet, the third largest in the world 90 percent of surface transport in terms of tkm, behind China and India, is estimated to carry 90 excluding pipelines. percent of all urban motorized person-trips, perhaps the highest level among nations with Although the average length of haul for rail similar levels of income. In large measure, this freight is over 900 kilometers (km), almost 17 situation reflects the fact that private car percent was over distances of less than 100 km, ownership is only about six cars per 100 while the average length of haul for road transport inhabitants, compared to over 40 in Western is surprisingly low, less than 30 km. By contrast, Europe. the share of rail freight in the United States is about 40 percent and in Western Europe well Russia is also highly dependent upon air service below 10 percent, while the average lengths of because of its vast distances and a governmental policy of maintaining low air fares. Owner of more than 8,000 aircraft, the world's Exhibit 1.2 Modal Shares of Soviet International largest fleet, Aeroflot carried nearly 133 Trade Tonnage, 1988 million domestic passengers in 1990 Modal Total compared to about 500 million in the U.S. Total Share of Percent and 1. I billion in the world in 1991. Foreign Total without Mode Import Export Trade (percent) Pipelines Transport's Role in International Trade. volume in millions of tons Before its dissolution, the USSR's annual international trade was about 500 million Railway 25.6 78.7 104.3 20.0 26.5 tons and the ratio of imports to exports was Maritime 82.5 193.7 276.2 52.9 70.2 roughly I to 4. The bulk of the trade was River 1.6 9.9 11.5 2.2 2.9 bywaterbornetransport. Excludingpipeline deliveries of oil and gas, maritime and Automotive 0.5 1.0 1.5 0.3 0.4 river-sea transport accounted for more than Pipeline 1.2 127.5 128.7 24.6 - 70 percent of the international trade Total 111.4 410.8 522.2 100.0 100.0 tonnage hauled (exhibit 1.2). Nonetheless, Russia's seatrade represented only 4 Source: Nikolai N. Kazanskiy, ed., The Economic Geography of percent of global seatrade. The freight Transpor (Moscow: Transport, 1991), p 143. volumes associated with foreign trade transactions represented less than 5 percent of all cargo movements within the FSU. 25 Chapter I Transport Network and Traffic Levels handling capacity for several types of cargo in Russian ports. Eleven of the FSU's 17 national Russia's present basic transportation infrastructure ocean carriers are under the Russian flag, includes railways, highways and road transport, representing 57.4 percent (13.6 million ports and maritime shipping, river transport, and deadweight tons [dwt] carrying capacity) of the airlines. former Soviet merchant fleet. The national carriers accommodate only half of Russia's Railways. Nearly 86,000 km of railway line is seatrade, much of which is done with tonnage operated by 19 regionally autonomous railway chartered from foreign shipowners. administrations. Until the breakup of the USSR, 17 of these were organized as a single unified River Transport. The bulk of the FSU river railway system with 15 other railways in the other transport system came under Russian jurisdiction, republics. After the dissolution, two more Russian including 100,000 km of navigable river sections regional railways were created in Kaliningrad and and man-made canals, as well as 9,000 cargo and Sakhalin. The rail system in the FSU is the most passenger vessels, 11 key ports, and hundreds of intensely used rail system in the world, carrying riverine cargo transfer facilities. About 570 3.9 billion tons (3.7 trillion tkm) and 4.2 billion million tons of cargo were transported within this passengers (417 billion pass-km) in 1990. Of this system in 1990, including 17 million tons of total, Russian railways carried 2.1 billion tons international traffic with special river-sea vessels. (2.5 trillion tkm) and 3.1 billion passengers (273 The largest portion of the domestic cargo was billion pass-km). In addition to the principal rail construction material. Roughly 75 percent of all system, there are some 151,000 km industrial river transport takes place within three major river railway lines in the FSU belonging to independent basins west of the Urals. There are 29 principal enterprises. river transport companies which are registered under the Russian flag. Highways and Road Transport. The public highway network contains 250,000 km of paved Airlines. Air transport in Russia is provided by road; road density is slightly above the average Aeroflot, which until the breakup of the USSR, for middle-income economies. Traffic levels on was a vertically integrated state enterprise the highway network are relatively light since responsible for airline service and for operation road transport was organized more as a feeder and development of airports and air traffic service to railways than as a competing mode and control. Russia has 6 international, 130 national, passenger car ownership is low. Total road freight and approximately 3,000 local or regional transport is provided by Russia's roughly three airports. Before the breakup, Aeroflot reportedly million trucks, of which about 1,500,000 belong owned more than 8,000 aircraft, of which 104 to state farms and other agricultural entities under were used in international service. In 1990 it Agroprom and about 700,000 to common carrier carried 133 million passengers throughout the trucking companies. Soviet Union. In 1991, Aeroflot carried 82 million domestic passengers, a drop of about 5 percent, Ports and Maritime Shipping Industry. The and 13.8 billion tkm of domestic and international Russian Federation has 41 seaports serving freight. Domestic passenger traffic in Russia fell international and cabotage trades. Seven are major to 62.6 million in 1992. Internationally, Aeroflot maritime ports: one on the Baltic Sea, one on the carried about 4.4 million passengers in 1990 and Black Sea, one in the Arctic, and four on the 3.7 million in 1991. eastern coast. Only 63 percent (164 million tons) of Russia's seatrade was channeled through Past Performance and Future Prospects domestic ports in 1990; most of the balance was handled by ports in the Baltic Republics and Russia's transport system is critical to the Russian Ukraine. Many specialized port facilities are in economy, with freight transport representing 9.1 other FSU republics, so there is now a shortage of percent of GDP in 1990, far higher than in most 26 Chapter I industrialized countries.' In the United States, the dollar value of Exhibit 1.3 Transport Ton-Kilometer per Dollar of GDP (Road, freight transport represented 6.3 Rail, and Water) percent of GDP in 1990.4 The difference is even more dramatic comparing the transport tkm per dollar of GDP for a number of F5U (22,2721- _ countries with the FSU as a whole. Poland (305) - 0.8C CSFR (126) p.82 According to World Bank figures, China (9,597) -76 transport tkm per U.S. dollar Canada (2.305) d74 equivalent of GDP in the FSU in the late 1980s was almost six times BuIctiS (111) -72 that of the United States and four U8A (9,167) 0.84 and a half times that of China5 Hungary (92) - .6s (exhibit 1.3). The fact that Russia India (2.973) - 0.6 and the other FSU republics relied Yugoslavia (266) 0.46 on transport to a greater extent than 8pain (499) 0 sr other countries is not a function of distance, as one might assume, but Hlad(4 of the way its industrial and social S0cdn (412) .32 sectors are organized. Industrial Belgium (30) 0.82 production is often concentrated in w. Germany (244) 0 2. a few number of huge complexes UK (242) 0.26 and their location was sometimes Italy (294) 0 2s based more on social factors than on France (54C) -0.22i i i economic consideration, such as ( minimizing transport costs. As a Austria (S3) 0.21 ,' result, the proportion of bulk products shipped is unusually high, 0 1 2 a 4 o 1988 tkm per $ of 1988 GDP freight transport is more intense, ( ) = Area in thousand square kilometers and there is an extraordinary dependence upon rail transport GDP is based on the purchasing power of currencies factor as presented compared to other countries. in Table 30 of the World Bank's World Developnent Report 1993. Unrali cSource of non FSU rail data: What Determines Demand for Freight Unrealistic costing and high levels Transport?, Bennathan, Fraser and Thompson. IBRD PRE Working of bulk rail shipments causes rail Paper 998, October 1992, p 11. transport to be underpriced and leads shippers to ignore the real value of service quality in logistics costs. over time. Comparisons with other countries show that transport demand is also related to the Relationship of Transport Demand to Gross structure of a country's economy. A study of the National Product (GNP). In general, growth in historic relationship of Russian freight transport transport levels is closely related to GNP, demand to GNP shows that transport demand has although changes in transport demand often grown rather faster than the general economic anticipate changes in GNP. This relationship holds growth.6 Further analysis, however, demonstrates broadly true for Russia, where total freight that a major growth component was associated transport has declined sharply since 1988, as has with energy, particularly with expansion of the the Russian economy as a whole (exhibits 1. 1 and pipeline system. Total transport grew at an 1.4). It would be a mistake, however, to assume average annual rate of 4.0 percent between 1970- that transport's relation to GNP does not shift 1990 (exhibit 1.4). Of this total, however, energy 27 Chapter 1 Exhibit 1.4 Volume of Russian Freight Transport (millions of tons) Est Modefrype/Organization 1970 1980 1985 1986 1987 1988 1989 1990 1991 1992 All Traffic 14,719 22.967 24,131 25.372 25.867 26,003 25,849 25,130 23,601 21,250 including General Purpose 4,429 6,446 6.123 6.532 6.705 6,807 6,663 6,367 5,855 4,375 Railway 6,089 8,150 8,713 8.924 8,981 9,082 8,865 8,497 7,745 7,350 including General Purpose 1,648 2,048 2,165 2.236 2,228 2,261 2,205 2,140 1,956 1,825 Road 7,853 13,597 14,137 15. 124 15,528 15,546 15,629 15,347 14,688 13,250 includingGeneralPurpose* 2,004 3.178 2,677 2.972 3.119 3,171 3,103 2,941 2,731 2,550 including Rosavtotrans** 1,48 2,946 2,458 2,74S 2.8S9 2.950 2,675 2,584 2,396 2,350 includingOwnAccount 5,849 10.419 11.460 12.152 12.409 12,375 12,526 12,406 11,957 10,700 River 388 538 592 604 624 638 639 613 564 515 including General Purpose 77 57 55 55 56 56 58 51 50 47 Sea 85 104 III 1'0 124 126 119 112 103 103 Pipelines 303 576 575 597 607 608 594 558 499 505 Air 1 2 3 3 3 3 3 3 2 2 *Includes intemational,intracity,intercity "Excludes Mosavtotrmns and St. Petersburgavtotrans. As .f 1993. 'Rosavtotrans' will be a Russian joint stock trucking company. Volume of Russian Freight Transport, 1985 to 1992 30,000 25,000 10,000 1985 1ipelines 1987 '.i--_River i988 < ; Sea 199 i - 1992 SOURCE: Ministry of Transport, RF, 4 November 199Z 28 Chapter I related transport grew by 5.8 percent a year, Economic forecasts are difficult in any while non-energy related transport grew by only circumstance, but the failure of the government to 2.4 percent; growth in the first decade was far implement macroeconomic policies that might greater than in the second. In the 1970s, energy stem the decline in output and near-hyperinflation related transport grew primarily because of creates greater uncertainty than normal. Further increased oil production, which is more transport uncertainty stems from the undetermined pattern intensive than coal. In the 1980s there was an of inter-republic trade flows, the rate of economic absolute decline in the production of coal and oil, recovery, and the degree of structural change but a marked increase in the output and average within the economy once economic recovery length of haul of gas. Over the most recent begins. decade, therefore, non-energy related freight Structural change and a move to a market transport grew more slowly than GNP (exhibit economy may eliminate uneconomic, obsolete, 1.5). and ecologically harmful industrial plants. A move from state-owned industrial giants to smaller Future Transport Demand. In looking to the consumer-oriented firms is likely to alter transport future, there is a need to assess the range of patterns significantly. The defense sector is also in economic growth likely to occur in Russia, decline and may never recover to previous levels changes in the structural nature of the economy of GNP. These changes will reduce the transport and the mix of output, and the consequent impact intensity of Russia's economy, but Russia's size, of both on the demand for transport. Freight scale and poor access to sea transport make it transport demand in the FSU will generally follow unlikely that the relationship of transport demand economic growth patterns and will continue to to GNP will decline enough to match that of other reflect overall economic developments for large countries such as Canada or the United domestic inland traffic and international flows. States. Exhibit 1.5 Domestic Freight Transport Demand and Its Relation to GNP Growth Rates Annual growth rate In percent 8% 2.5%- 2%- 0.5% 0% 1970 1975 1980 1985 1990 Year Freight Task & GNP Energy-related 3 non-Energy-related GNP Source. IBRD graph of data from EBRD Rail Sector Survey Report, p. 20 29 Chapter I Despite such difficulties, consultants financed by corresponding increase in medium-distance hauls. EBRD to assess the FSU railway sector used a In a privatized, deregulated, market-oriented combination of U.S. and Canadian input-output environment, road transport increasingly will tables to derive relationships of transport to 18 become the mode of choice for shippers of high sectors. They applied these relationships to value or time-sensitive commodities, since road PlanEcon's forecasts of Russia's economy to transport offers faster and more flexible service prepare low, median and high growth scenarios.7 than railways. Although road transport may cost Their forecasts examined energy related transport more than rail transport in terms of tariffs, the demand separately from non-energy related price is usually less than the production time lost demand, in part because the two most important or extra inventory carrying cost associated with sectors in the CIS are agriculture and energy. slower railway service. Road transport is now Annex A provides detailed statistical projections. competitive on a cost basis alone for distances up Annex B provides details of the demand analysis to 100 kilometers. Nearly 18 percent of traffic by commodity, based on the EBRD-financed moving today on Russian railways is carried less studies of railways, waterborne transport, and than 100 kilometers, and as more heavy and roads. Except as noted, the demand information articulated trucks enter the road transport fleet and that follows is based on these studies. the highway network is developed, the breakeven distance will increase. In the United States, for Future Transport Demand and Change in Modal example, the distance at which rail becomes Mix. Looked at as a whole, the forecast of competitive with intercity trucking is 800 miles. transport demand in the FSU is sobering. The overall downturn of the economy and the shift Several factors affect the pace and size of the from raw materials and industrial goods to lower- shift of freight traffic from the rail system to road density general freight will keep overall transport transport in Russia: levels below those of 1988 for years, probably * The speed at which the economy recovers until 2015. The likelihood of flat or declining and becomes more market-oriented. demand for the next several years is quite high for * The rate of growth in new businesses that every major commodity in the freight transport generate time and service-sensitive traffic that traffic base. In fact, in view of recent trends and never will be shipped by rail. the World Bank's more pessimistic forecast of the 0 The speed at which road transport services energy sector, as discussed below, it is likely that are privatized and pushed by the drive of self- transport demand will be substantially below the sufficiency to provide flexible, fast and reliable EBRD-financed forecast, making it almost certain service. that demand will continue to decline. The other significant trend expected is an increasing shift Impact of Energy Subsidies. Offsetting these from rail to road. Compared with its present 13 factors could be the speed at which fuel prices percent share, it is expected that the road within Russia are brought to world prices and transport share of non-energy transport by 2015 passed on to the transport user through higher will be 22 percent in the low growth scenario and tariffs. Rail transport is more fuel efficient than 41 percent in the high growth scenario. truck transport. More than 70 percent of the tkm The dynamics of the shift from rail to road transported by rail are moved by electric power, depends upon the onset and vigor of Russia's which is theoretically less expensive than diesel- economic growth. The forecasts assume the ratio powered train transport. Electricity in Russia, of transport demand to GDP will be 1 to 1 for rail however, is also highly subsidized, because it uses and road transport until the economy begins to a large amount of subsidized coal and gas. The grow; thereafter, it is assumed transport demand government is being urged to eliminate its implicit will grow at a 1.25 to 1 ratio, with a general shift subsidy of all energy production. The degree to to road. The assumption is that transformation to which the relative transport tariff between rail and a market-based economy will cause a shift toward road transport changes as petroleum prices rise to lighter industrial and consumer goods and a world market levels will also depend upon the 30 Chapter I degree to which the government eliminates production which has also declined dramatically in subsidies to other energy producers. the last several years. For the future, coal exports World Bank analysis shows that the to Eastern European nations are no longer government's implicit subsidization of electricity expected to grow, but they may increase from is almost twice as high as the subsidy of Russia's far east to the Pacific region. The real petroleum based fuels. Based on estimates of fuel issue is whether overall coal exports of Russia consumption, rail transport's share of subsidies of will increase, since both the production and oil and electricity in 1992 was equivalent to transport of coal were heavily subsidized. Rb20.8 billion, using a simulated exchange rate of The driving force in Russia's energy sector now R91/US$1, while the for-hire road transport and for the foreseeable future is the dramatic drop industry's share of oil subsidies is about Rb5.0 in domestic consumption caused by the sharp billion. These subsidies represent about RbO.0l macroeconomic decline. Based on the decline in per tkm for railways while the road subsidy is on domestic demand, the World Bank estimates that the order of RbO.09 per tkm, or about nine times energy production will decline by 20 to 30 percent that of rail. This means that the shift from rail to despite the fact that export demand for oil and gas road transport could be slowed by efforts to end should remain strong. The fall in domestic fuel subsidies although the degree to which it will consumption of oil and gas is likely to continue do so depends upon the total transport costs of through 1995 or 1996, with slow recovery in 1996 each mode. At the same time, the shift to or 1997. Coal production is expected to continue world prices of energy will also discourage to decline through the decade, driven largely by excessively long distances between industrial both the closure of uneconomic mines and the sources. This trend will reduce rail traffic and continuing decline in industrial consumption, and favor shorter distances where trucks have an will not be offset by the expected increases in inherent advantage. In the longer term, those who utility demand for coal. need to transport freight will make their decisions This scenario of future energy demand, based based on total transport costs including the on the World Bank's understanding of the Russian carrying costs of the merchandise during the energy sector, contrasts with the forecast of period of shipment, the costs of handling and energy production by the consultants who storage, and the transport costs per se. developed the transport demand forecast used in this report. This forecast energy production to Energy Freight Demand. Next to agriculture, grow overall at about I percent a year over the energy - comprising coal, oil, and natural gas - next 20 years, with oil remaining stable, coal is the most important sector in the CIS economy declining about 30 percent in energy terms, and in terms of transport demand. More than half of most of the growth related to increases in natural the work of the country's transport system gas production (exhibit 1.6). The forecast involves the fuel-energy complex. Rail transport "assumes an increase in the average haul for gas accounts for 97 percent of the coal tkm, making and oil as the more accessible fields are depleted rail indispensable to electric power generation and while the average haul for coal remains constant the steel industry. Rail handles a quarter of the as rationalization and a greater level of on-site petroleum transport, an inordinately high figure preparation balances the development of more compared to the percent in the United States. The distant coalfields".9 Since the World Bank's energy sector and the non-pipeline transport sector energy forecast is more recent and based on a are inextricably linked in Russia and will be for more detailed analysis of the sector than the foreseeable future.8 undertaken by the EBRD-financed consultants, it Coal production has declined 20 to 30 percent is likely that energy transport demand will be since 1989, due principally to: (a) higher mining substantially lower than forecast in their studies. costs; (b) declining demand from the heavy For non-pipeline transport of coal and refined industry and power sectors; and (c) shifts to petroleum products, the major issue for the future alternative fuels (mainly gas). Demand for is to ensure that existing rail capacity is utilized domestic coal is particularly sensitive to steel efficiently. 31 Chapter I Minerals and building materials include cement, bricks, stone, sand and gravel, which make up Exhibit 1.6 Energy Transport Demand, large tonnages by rail, water, and road. Cement 1980 to 2015 production fell to 77 million tons in 1991 from a peak of 85 million tons in 1989. Demand for O Ntk- (n.111mn) sand, gravel, and aggregate, hauled predominantly by inland water transport, is concentrated in construction industries and road building. Demand in this sector will follow yet lag somewhat economic growth. Russia is the world's largest producer of wood 2p wa ~ ~ ~1" ~ products, with forest reserves located predominantly in the far east, east and west ° 19H0 I9S 990 ? Med-om High Siberia, the northwest, and the Urals. Plywood, Coal Oil =Gas chemical pulp, and paper products are increasing as percentages of total wood products. As Source: EBRD Railway Sector Survey Main Report production moves from the northwest and the Urals into Siberia, rail hauls, which carry 60 Non-Energy Freight Demands. The EBRD percent of wood product tonnage, should consultants' projections for non-energy related lengthen. Combined inland and river-sea transport transport were based on forecasts of GNP that accounts for about 29 percent of forest product assume an historic elasticity of 1 - as was the tonnage. Timber is a major river-sea vessel export case from 1980 to 1990 - until the turnaround in commodity and a major export commodity from the economy is reached. Thereafter, "the forecast Black Sea and far east ports. assumed that the transport-intensity declines as the Fertilizer production includes: (a) 7.5 million economy restructures until, when the economy has tons of phosphates; (b) more than 30 percent of reached a level twice that of 1989, the relative the world's potash production (1 I million tons in level of transport has reduced by 25 percent"'" 1988); and (c) the world's largest production of (exhibit 1.7). nitrogenous fertilizer. Future demand will depend on export markets, for which there is strong Economic sectors affecting non-energy bulk competition. Rail hauls 88 percent of the tonnage. transport demand include iron ore and steel, Phosphate exports pass through the port of minerals and building materials, timber, and fertilizers. Iron ore and steel transport requirements are Exhibit 1.7 Non-Energy Transport Demand, likely to fall as Russia (a) becomes more efficient 1980 to 2015 in steel-making by moving away from open-hearth technology, (b) substitutes lighter metals for steel in many manufacturing processes, and (c) reduces emphasis on defense industries. Russia's steel production - two-thirds of all CIS steel - peaked at 94 million tons in 1988 and declined to 78 million tons by 1991. It is likely to continue to a decline and may never recover to 1988 levels. 2 Decreased orders from the military will reduce consumption: other republics may also develop ....... ...... their own self-contained steel industry. Rail moves i" l low . m , o 93 percent of iron and manganese ore mined and -, 4, +eO Hi about 76 percent of steel tonnage moved." Source: EBRD Railway Sector Survey Main Report 32 Chapter I Murmansk, while nitrogen fertilizers are exported distribution of Russia's international transport is primarily to Eastern Europe. the low level of containerization. Consultants estimate that the level of containerization in Agriculture Freight Demand. For the transport Russian transport is about one-fifth of the average sector, agriculture means grains, to which the CIS prevailing in international trade. In 1990, for countries devote more land than any other region example, about 10 percent of the 79.6 million tons in the world, but at low yields that leave the CIS of CIS international traffic was containerized. In behind both China and the United States in grain comparison, by 1989 about 46 percent of the production. CIS grain production in 1989 was 193 world's 625 million tons of international trade was million tons, which left them as a net importer of containerized. Attempts to introduce grains for several reasons: (a) difficult climatic containerization, such as the SeaLand landbridge, conditions in most grain growing areas; (b) widely have met with mixed results." Landbridge traffic dispersed grain growing areas; (c) inadequate, in 1992 was approximately 55,000 containers, poor quality storage; and (d) an insufficiently down from a 1989 high of about 100,000. In large trained and motivated work force. A 1992 study part this drop reflected the physical and of the FSU agricultural sector indicates that annual institutional strains affecting the rail network imports of grain into Russia have averaged 19 to growing out of the disintegration of the all-Union 22 million tons, consisting of about 50 percent rail system. wheat, 40 percent maize, and 10 percent barley. Only a small portion of Russia's grain imports are The difficulties afflicting every mode in Russia 's from other CIS republics. Grain imports from transport system make it difficult to achieve the Kazakhstan have been 1.5 to 2 million tons per integration and cooperation needed for an year, virtually all of it wheat. Total imports from effective container system. Efforts to impose all other republics have been about 1 to 2 million containerization on the disorganized transport tons, mostly from Ukraine. The remaining 16 to system are not likely to succeed. The lack of a 20 million tons came from outside the FSU, healthy and growing container-based intermodal accounting for nearly half of all grain used as transport system for both international and food and about a seventh of all grain used as domestic trade will presentphysical and economic feed.2 The same report indicates that if subsidies barriers to the growth of Russia's international to beef producers in the form of underpriced feed commerce. grain are eliminated, demand for beef in Russia could drop by as much as 25 percent, with a consequent drop in the requirement to import grain. Exhibit 1.8 Passenger Demand, 1980 to 2007 Agricultural restructuring could virtually eliminate grain imports, and dramatically reduce imports of sugar, milk products, and vegetable Poren oil. While trucking plays the major role in short- haul food movements, 90 to 95 percent of the tkm involved in domestic food transport is provided by rail. Grains made up more than 83 percent of the Iwo tonnage for food imports to the CIS in 1989, split low. almost evenly between Baltic and Black Sea ports.r E Inland waterway movements of grain average a minor 7 million tons per year, most of which are transshipments at Novorossijsk to river-sea vessels . ino L- Mqdium R11O for delivery upstream.'3 = h. E C., Ai ADnen-R.B Containers and International Commerce. Source: EBRD Railway Sector Survey Main Report Another factor affecting the economy and 33 Chapter I Passenger Demand. Passenger travel is expected railways are being encouraged to raise local to respond to changes in income levels and commuter rail fares in consultation with municipal changes in relative prices. According to EBRD authorities. The political climate for implementing consultants' forecast, "given constant prices, the such price increases may vary from place to place overall passenger market is expected to grow at and thus introduces intermodal distortions. the rate of growth of the economy with longer Nonetheless, demand for passenger traffic should distance travel growing somewhat faster and short- grow significantly. distance trips slower. Real price changes would The forecast described above seems difficult for similarly affect long-distance trips more than some transport experts in Russia to find credible. short-distance trips."'5 The forecasts also take into Government forecasts do not incorporate such a account suppressed passenger demand within slow recovery nor any modal shift. They predict Russia and the FSU (exhibit 1.8) and assume no that traffic levels will rebound far more quickly intermodal distortions regarding tariff patterns or and do not foresee much shift from rail to road. subsidies. In fact, the government is increasingly Both Ministry of Railways (MPS) and the subsidizing passenger transport, although buried in government forecast a far faster rebound in rail support to local and regional budgets since transport demand than do the EBRD consultants responsibility for urban transport has devolved to (exhibits 1.9 and 1.10). local authorities. Responsibility for covering the In terms both of transport volume and task, cost of suburban commuter rail transport has been MOT projects recovery in all surface modes left to individual railways to cross subsidize with except for waterborne and pipeline transport freight resources. To improve cost recovery, local within the context of an overall rebound in authorities have been authorized to impose a tax demand (exhibits 1.11 and 1.12). By 1995, under on enterprises for urban transport and individual the influence of more favorable economic Exhibit 1.9 Russian Rail Passenger Projections (1988 = 100) Millions of Passenger-kilometers 210 IS O . .................................................................... ..................... .............. 19 0 . ............................................................................................................ 17 0 . ............................................................... ................................ 17 0 . .......................................................I.......................................... ................... 1e 0 . ......................................................... ........... .......... ................... 160 _ ~~~~...................... ....... .............................. .' .:.. .. ; 120 . ............ ..... ................................. 1200 ... ;. . .............. _.._ a10 _ . .. ..... 7......................................... ..... ..... 100 . \H. 7 0 . ........................................................................ ............... ................... 1980 1986 1990 1995 2000 2007 2016 Year -Low (EBRD) -+-Medium (EBRO) -*-HIgh (EBAD) 6-MP8 Sources: Data and forecasts derived from EBRD Rail Sector Survey, p 35, and from Russian Ministry of Economy. 34 Chapter I Exhibit 1.10 Russian Rail Freight Projections (1988 = 100) tkm i980 1985 1990 199a 2CD0 2007 201S X Low (EBRRO +tM.dlum (EBRO) -*HIgh (EURO) 9IPS -Rualsln Govt developments, the increase in transport demand is countries (exhibit 1.13). Failure to acknowledge expected to continue, having reached by that time that changes in the economic framnework will levels reminiscent of the 1970s. The volume and inevitably shift transport demand could lead to the task of pipeline transport, however, are projected inappropriate allocation of government resources to decline through 1995. in transport. On the basis of these projected increases, government transport planners argue for Impact on the Railway Sector. In broad terms, continuing investments and budgetary support on the shift to a market economy will significantly an almost business-as-usual basis. The railway reduce the level and composition of rail traffic as investment budget, for examnple, includes the economy as a whole shifts away from the expansion of existing lines, construction of new production of basic commodities and toward lines, and continuation of electrification without production of higher value goods. An additional any analysis as to whether these investments make shift will come with the growth of competition sense in light of more realistic forecasts, reduced from the trucking industry, a shift that will be demand and a changing customer base oriented enhanced by increased shipper choice. The toward fast, reliable service. The Minister of Russian railways system will have to undergo a Railways has also endorsed hiring 11,000 more major change in operations and service in order to employees for the expected recovery of rail traffic be able to respond to coming changes in transport levels. Based on experience elsewhere, the demand. Investment plans should be re-examined government's forecasts are too optimistic. A to ensure that they still make sense and that they further decline in transport and a shift in modal focus more on enhancing the use of available mix is inevitable, as government policies move resources than on expanding rail service. More away from a command to a mixed or market fundamentally, however, planners need to rethink economy as has happened in several other the economic and social role of railways witLhin 110~ ~ ~ ~~~~~~~~~~~~~~~~~~~3 Chapter I Exhibit 1.11 Actual and Forecast Volumes of Russian Freight Transport, 1991 to 1995 (million tons) Est Prol Prol Prol Mode 1991 1992 1993 1994 1995 All Traffic 23,601 19,088 17,700 18,201 19,101 including General Purpose 5,855 4,375 4,560 4,725 4,900 Railway 7,745 6,678 6,170 6,300 6,550 including General Purpose 1,956 1,825 1,910 1,975 2,050 Road 14,688 11,504 10,703 11,073 11,724 including General Purpose' 2,731 2,550 2,650 2,750 2,850 including Rosavtotrans" 2,396 2,350 2,250 2,325 2,450 including Own Account 11,957 10,700 10,900 11,100 11,900 River 564 374 339 363 382 including General Purpose 50 47 46 51 55 Sea 103 101 87 90 94 Pipelines 499 430 400 373 348 Air 2 1 1 2 2 'Includes international,intracity,intercity "Excludes Mosavtotrans and St. Petersburgavtotrans. As of 1993, 'Rosavtotrans" will be a Russian joint stock trucking company. Volume of Russian Freight Transport, 1991 to 1995 Actual and Projected million tons 25,000r 20,0004l_ SORE Miisr oA Trnpot R 4_ Noebr19 3615,000 10 J j X 0 7 F^ll~~~~~~~~~~~~~~~~~~~~~~~~ Traf' ic I~~~~~ I SOURCE: Ministry of Transport, RF, 4 November 1 992 36 Chapter 1 Exhibit 1.12 Actual and Forecast Russian Freight Transport Task (billion tkm) Est Proj Proj Proj Mode 1991 1992 1993 1994 1995 All Traffic 4,388 4,236 3,385 3,410 3,488 including General Purpose 4,104 3,800 3,850 4,000 4,350 Railway 2,362 2,250 1,861 1,909 1,995 including General Purpose 2,319 2,150 2,275 2,375 2,450 Road 290 263 223 233 249 including General Purpose 64 59 62 64 67 including Rosavtotrans" 55 51 52 54 56 including Own Account 235 204 206 211 221 River 200 183 137 146 154 including General Purpose 195 181 177 188 205 Sea 470 470 330 350 375 Pipelines 1,057 1,070 832 770 713 'Includes international,intracity,intercity "Without Mosavtotrans and St. Petersburgavtotrans. As of 1993, "Rosavtotrans" will be a Russian joint stock trucking company. Russian Freight Transport Task, 1991 to 1995 General Purpose Cargo Actual and Projected billion tkm 1,500 3,o500 _-' t _ 1,0500-l44s 1 992 199 1 1 995 I Truck f River * Sea E Pipeline E Rail O All Modes SOURCE: Ministry of Transport, RF, 4 November 1 992 37 Chapter I the context of a changing economy. A major created contractors, but the road funds are likely strategic planning and restructuring effort will to be insufficient to clear the backlog. undoubtedly be required to position the railway for the future. Impact of Changing Demand on Ports. The most immediate impact of the dissolution of the USSR Impact of Increased Road Transport Traffic. For on Russian ports was to diminish capacity. For the the reasons described above, freight and passenger future, plans to replace that capacity should take road traffic are likely to increase faster than rail several factors into consideration: traffic, putting increased demands on the highway * Russia's grain imports should fall over time infrastructure. Unless measures are taken to as domestic agricultural productivity rises and protect Russia's existing highway network from elimination of subsidies reduces demand for feed deterioration and collapse, the highway network grain. will constrain the expected growth in road 0 The evolution and restructuring of the transport. Poor quality construction or transport system will increase the need for rehabilitation, inadequate maintenance, and the efficient and economical container handling frequently poor quality of bituminous material terminals. used in road construction means that at least 38 In view of the macroeconomic situation, percent of the trunk road system requires however, it is inadvisable to commit to requested rehabilitation or reconstruction, at an estimated investments without rigorous cost-benefit analyses cost of about US$22 billion in the next five to and without considering individual port seven years. Many bridges also need attention. corporatization, privatization, and restructuring Without substantial reform and additional plans. funding, the highway sector will not be able to prevent the collapse of Russia's road Financial Performance of Transport Entities is infrastructure. Efforts to reform the institutional Declining. The decline in transport demand to role of highways are encountering difficulties. The date, combined with rising fuel prices and government has created a number of "concerns," inflationary pressures on wages, seriously or companies to replace MOT construction and undermines the financial integrity of Russia's maintenance organizations and has established transport system. Until recently, the transport road funds to finance works by these newly sector showed steady profits in all modes except for urban transport, which was cross-subsidized Exhibit 1. 13 Rail Share of Combined Rail and Truck (tkm) 110- 1001 + CSFR 901 o- K> Fmance 70- eo- +X Germany 60- 40- ~ = X 0 U.K. 30- L-I Hungary 20-i tO z < Poland OI, .. .. . ... . .. .. .. tS90 19B 1970 1976 lOB0 I B5~ 1 9SB Source: Privatization Problems at Industry level. Road Haulage in Central Europe, Bennathan and Thompson. IBRD Discussion Paper 182. 1992. p 7. 38 Chapter I with freight earnings. The single greatest federal competition among carriers, any normal analysis fiscal problem in transport has been urban of profits is irrelevant. Currently, there is no way transport, but the explosive growth in deficits on to assess the financial performance of road suburban commuter railways and in airline transport enterprises accurately, but anecdotal subsidies is also a problem. Public pressure to evidence indicates that trucking enterprises are maintain low prices for urban public transport, experiencing financial difficulties, particularly as intercity passenger air and rail transport, and rail collection of accounts receivable is increasingly freight transport will be great. Political officials, difficult. whose constituencies want to keep rates low in the 0 Urban Transport. Urban transport has face of declining individual purchasing power, are historically lost money, but the sector's current under tremendous pressure to let transport wage financial situation is so poor and worsening so costs rise along with other enterprise costs, such rapidly that funding its increasing deficits is now as spare parts and fuel, while holding down fares. a major problem for the federal government. Some highlights are instructive: According to MOT figures (exhibit 1.14), losses * Railways. Net income in 1991 for Russian for passenger transport were Rb3.17 billion in railways was only Rb300,000 compared to an 1991, estimated at RblOO billion for 1992 estimated Rb4.6 billion in 1990.16 Adjusting for (October 1992 prices) and expected to climb to inflation makes the situation even worse. The Rbl trillion in 1993. Of these totals, by far the operating ratio eroded from 32 percent in 1988 to greatest losses are in bus transport. 73 percent in 1990 and 99 percent in 1991. MPS * Sea and River Transport, and Ports. During is increasingly unable to subsidize losses in the Soviet period, ports and water transport passenger traffic, forecast at Rb53 billion in 1992. companies theoretically covered operating costs Total railway losses in 1992 were expected to be out of their service revenue incomes, and the Rb73 billion. The Federal budget was revised central authorities provided required investment. recently to support capital expenditures for This objective was hardly ever achieved, and the railways, particularly those requiring foreign FSU government had to allocate around Rb2O currency. The 1992 Federal budget included Rb22 million a year as operating subsidies to shipping billion for rolling stock purchases. The 1993 and ports. The Russian Federation not only Federal investment budget includes Rbl09 billion for MPS. * Airlines. Aeroflot's operating results are Exhibit 1.14 Urban Passenger Transport deteriorating in real terms. Although operating Operational Losses (Rb billions) income reportedly rose from Rb5O4.9 million in 1990 to Rb2.5 billion in 1991,17 expenditures were expected to exceed revenues by R18.6 billion. As 1993 of November 1992, Aeroflot estimated that its 1991 1992 Est. revenues cover only 70 percent of its costs. Busee 1.73 58.3 589.6 * Road Transport. Financial data for road Metros 0.34 4.4 11.0 transport is difficult to obtain and confusing to Surface urban electric 1.10 23.6 425.0 transport analyze since there are so many enterprises that Tot 3.17 100.3 1,014.6 conduct both passenger and freight transport and use the revenues of the latter to support the Railway passenger losses 204.0 former. According to figures from the annual statistical compendium National Economy of the a. With suburban routes. USSR, road freight transport was profitable through 1990, total earnings were RbS.5 million, Source: Russian Ministry of Transport, given to World through 1990. total earnings were Rb5.5 million, Bank mission, November 1992 and June 1993. For and it subsidized urban transport. It is not clear railway estimate, Interfax Business Report, No. 29 whether these figures include freight transported (432) 11 February 1993, p 3. by Agroprom enterprises. In either case, as costs were passed on to customers and there was no 39 Chapter I Exhibit 1.15 Financing Transport from the State Budget, 1992 (billions of rubles) Internal Road Railways Aviation Maritime Waterways Transport Total Mode 1992 1993 1992 1993 1992 1993 1992 1993 1992 1993 1992 1993 State centralized 22.0 109 17.80 40.8 2.60 210.4 2.40 14.6 17.40 26.4 62.20 401.2 capital investment Education 7.0 2.35 2.00 1.60 0.54 13.49 Health care 4.0 4.00 R&D 0.85 0.06 0.06 0.06 1.03 Maintenance 2.90 2.90 Hydrographical, 0.44 0.44 rescue & other special services Subsidy for 1.5 34.80 47.0 2.0 0.40 5.0 81.90 1014.6 118.60 1068.6 passenger transport operating losses Total 34.5 109 55.80 87.8 5.10 212.4 7.40 19.6 99.90 1041.0 202.70 1469.8 Source: Russian Ministry of Transport, provided to World Bank during missions in November 1992 and June 1993. discontinued such subsidies, but introduced new adding provisions to provide subsidy payments in taxes - 32 percent on ruble profits and 50 percent the federal budget (exhibit 1.15), the MOT 1992 on foreign exchange income - which now have to budget included about Rb202.66 billion from be paid by ports and water transport companies. government to support losses and investments in The combined tax and mandatory hard currency all modes of transport, excluding highways, for transfers to the national treasury are estimated to which new road funds were created. Subsidies for have reached the equivalent of about US$400 operating losses alone were estimated to be million in 1992. Rbll8.6 billion, including an estimated Rb89.9 Ability to Make Investments in Equipment and billion to cover losses from municipal urban Operations is Declining. Declining cash flow and transport, much of which is financed by the inflation is seriously reducing the ability of the federal budget in the form of subsidies to local transport sector to replace assets and maintain and territorial budgets. According to MOT, total operations. Despite increased expenditures, the urban transport losses are expected to climb to ruble's declining value has meant decreasing Rbl trillion in 1993. levels of rolling stock actually obtained. The economic situation in Russia has also lowered the Comparison of Federally Supported Transport supply side of transport vehicles. The production Expenditures to the State Budget. Total of trucks decreased by 5 percent from 1991 to expenditures in Russia's 1992 state budget have 1992, and production and deliveries of rail been estimated by the World Bank to be on the equipment dropped by even greater levels. order of Rb7,730 billion. Included in this amount are: state financed investments of Rb459.6 billion, Transport Losses and Subsidies. Transport budgeted subsidies of Rbl,315 billion, defense losses have already resulted in the government's expenditures of Rb855 billion, foreign 40 Chapter I expenditures of Rbl,422 billion and other subsidies, which in 1992 exceeded the budget operational expenses, including socio-cultural deficit as defined by the Ministry of Finance, is activities, internal security and administrative another area where the government provides costs, of Rb3,640 billion. support to the transport sector. Transport's total share of such import subsidies could not be Expenditures within any given sector are determined, although railways received support difficult to compare to the overall budget because for the acquisition of rolling stock imports. costs from each sector are spread among a variety of categories. For comparison, the World Bank Implicit Energy Subsidies. Subsidies - both has limited its examination to calculating the explicit and implicit - are an impediment to transport sector's share of budgeted subsidies, attaining macroeconomic stability and overall unbudgeted subsidies, state financed investments, economic recovery. Energy consumption is by far and implicit subsidies. Comparison of transport the largest subsidy in Russia, and its opportunity subsidy expenditures to the entire federal budget cost, measured at the market exchange rate, is exceedingly difficult, as the budget categories greatly exceeds total GDP. This subsidy is mainly are being revised and because complete implicit and results from the large discrepancy information is lacking regarding transport's share between domestic prices and the value of energy of unbudgeted subsidies from import subsidies or at world prices. According to World Bank import subsidies through CBR's directed credit analysis, implicit subsidies of energy represented programs. Russia's 1992 federal budget 122 percent of GDP in 1992 at an Interbank expenditures, including defense, directed exchange rate of Rb2O3/US$1 (exhibit 1.17). The subsidies, and state investments totalled Rb5.5 analysis also attempted to measure the relationship trillion, while total revenues were Rb4.7. Total of energy subsidies to GDP, taking into account GDP for 1992 has been estimated to be Rb 15.7 the effect increased energy exports would have on trillion. Budgeted Subsidies. Based on World Bank analysis of data obtained from the Ministries of Finance and Transport, budgeted transport Exhibit 1.16 Transport Subsidies Compared to Total subsidies totalled RbI43.0 billion including State Budgeted and Unbudgeted Subsidies, subsidies for operating losses of urban transport 1992 (millions of rubles) and support to airlines and railways for fuel increases and tariff support (exhibit 1.16). 7his Transport Total is equivalent to 11 percent of Russia's budgeted Budgeted subsidies 677.7 subsidies. World Bank analysis shows that Consumer subsidies explicit budgetary subsidies throughout the Public transport 81.9 economy are equivalent to 22 percent of GDP; Airline tickets, northern regions 24.8 Railways and aircarriers 36.3 thus, transport subsidies are 2 percent of GDP. Subtotal 143.0 Producer subsidies 637.6 Unbudgeted Subsidies. The federal Total subsidies 1,315.3 government also subsidizes enterprises and Percent transport related 11% agencies by subsidizing import and by extending Unbudgeted or partially budgeted directed credits from the Central Bank of Russia subsidies Import subsidies 2,721.3 (CBR) through the Ministry of Finance (MOF). Interest subsidies 3,145.2 These subsidies are estimated to represent 21 Total, unbudgeted subsidies 2,963.1 percent of GDP. The degree to which such Total subsidies 4,278.4 credits are provided to the transport sector is not known, but government support has clearly been given for transport investments where earnings Source: Data proided by Russian MOF. Calculationsprovided do not cover the cost. "Off-budget" import by World Bank. 41 Chapter 1 the exchange rate if oil and gas export restrictions new ships. Another Rb26.4 billion is included in are liberalized. The magnitude of energy subsidies the federal capital investment budget, but not was calculated a second time using a simulated within the MOT budget, to purchase buses for exchange rate proposed by the Research Institute urban transport. In determining the priorities for on Prices of the Russian Ministry of Economy. such imports, MOT works closely with MOF. For The implicit subsidy at the simulated exchange every dollar spent on imported buses and spare rate of Rb9l/US$1 represented half of GDP. parts, MOF provides eighty cents to cover the Although the analysis should be treated with exchange rate burden. caution, it shows the pressing need to rationalize energy prices. Operating Subsidies. As inflation continues, these deficits are likely to soar and there will be World Bank estimates of the physical volumes increasing demands on the federal budget to of energy consumed show that transport's share of subsidize various transport operations. all oil produced in Russia exceeds 22 percent and * Railways. The revised federal budget of its share of domestic consumption exceeds 36 May 1992 estimated railway passenger losses to percent. As a share of GDP, therefore, the be Rb53.3 billion, most of which are cross- government's implicit subsidy to transport is subsidized by freight earnings; but in mid-year, between S and 13 percent, depending on the Rbl.5 billion was added to the federal budget to exchange rate used. World Bank estimates show help subsidize railway passenger losses. MPS' that transport's share of electricity consumed in proposed 1993 budget included an allocation of Russia is about ten percent. As a share of GDP, therefore, the government's implicit subsidy of electricity to transport is between 2.5 and 6 percent (exhibit Exhibit 1.17 Subsidies on Energy Consumptior 1992 1.18). State-Supported Investments. The Subsidy Subsidy Subsidy Subsidy as 1992 federal budget includes Rb62.18 Level as Share Level Share of billion for transport investment and (trillions of GDP (trillions GDP 12 percent of the total state Rb) (percent) Rb) (percent) investment budget, excluding defense. Simulated Exchange Interbank Exchange Rate Railway investments were on the Type Us Rate (Rb91o/US$) (Rb2f3/US) order of Rb22 billion and another Energy Used R Rb42.18 billion supported MOT Oil 2.1 13 5.5 35 expenses, including the acquisition of Gas icebreakers. The 1993 federal capital 2.9 18 6.6 42 investment budget includes Rb59 Coal 0.2 1 0.5 3 billion for MPS to purchase rolling Electricity 4.0 25 9.8 62 stock and Rb5O billion to construct rail facilities and lines of national Total energy 7.9 50 19.2 122 importance. The 1993 Federal capital investment budget for MOT totals RB69.4 billion, including Rbl4 GDP for the whole year is estimated at Rbl5.7 trillion. billion to purchase maritime vessels, Rbl4.6 billion for river vessels, and b. In order to avoid double counting, Rb3,111 billion (Rbl,408 Rb37.9 billion for airplanes. In billion) has been deducted from total subsidies, since 30 percent of addition, a Rbl96.4 billion fund, to coal and 45 percent of gas are consumed by the electric power be financed from foreign exchange sector revenues earned by the maritime Source: World Bank calculations. fleet, has been established to acquire 42 Chapter I Exhibit 1.18 Physical Energy Consumption by Transport Modes, 1992 Petroleum' Electricity' Gasc (million tons) (billion kilowatt hours) (billion m3) Total 91.3 82.89 1.72 Rail"' 4.3 37.45 Air (domestic and international)f 7.8 Trucks, intercity buses and automobiles 61.0 1.72 (including Agroprom)t Urban buses 2.2 Inland waterways 10.5 Maritime fleets 5.5 Trams, trolleys and metros 45.40h a. Total oil production in Russia in 1992 is approximately 399 million tons, of which 250 million tons equate to apparent domestic consumption. Thus, transport's share of oil is in excess of 22 percent of total production and in excess of 36 percent of apparent domestic consumption. b. Total electricity production in Russia in 1992 was estimated at 852.4 billion kilowatt hours (kWh) by a World Bank/International Energy Agency (IEA) joint mission to Russia in late 1992. Transport's share of electricity in 1992 is estimated to be 10.3 percent, based on the mission's estimates of actual share of electricity consumed in 1990 and 1991. c. Total gas production in Russia in 1990 was 404 billion m3. Transport's share of direct natural as consumption was only 0.4 percent. Since the number of natural gas powered vehicles remained about the same from 1989 through 1991, it was assumed the 1990 consumption would remain about the same in 1991 and 1992. Transport's share of implicit gas subsidization is accounted for, in great part, in the implicit subsidy to electric power consumption, of which gas is a primary input. d. Does not include industrial railway energy consumption. e. Fuel used on international flights (roughly 1.3 million tons) are included since their fuel prices are subsidized by Government. Moreover, as the world price for jet fuel is on the order of US$188/ton as compared to US$130 per ton figure for oil used in the analysis of energy subsidies, the estimate of implicit fuel subsidy to this subsector has been understated. f. Includes 35 million tons/year gasoline consumed by vehicles operating on inter-urban roads and 2.6 million tons/year diesel consumed by vehicles operating on intercity roads. g. It is assumed that the maritime fleet involved in international trade obtains 50 percent of its fuel (5.1 million tons) while abroad so this difference is deducted from the total maritime fleet of 11.0. h. 28.1 billion kWh of this total are consumed by trams and trolleybuses (based on 1992 consumption figures). The balance can be attributed to metro system consumption. Sources: Petroleum information from Interfax reports, PlanEcon data, and World Bank data. Rail data from Statistical Report on the World of Railway Transportfor 1990. Electricity data from Russia Electricity Demand Forecasts prepared by IBRD/IEA mission, December 1992. Aviation data from Aeroflot Annual Reports, 1990 and 1991. Urban transport data from Moscow Resident mission data research. AU others: World Bank analysis of material provided by Russian MOT. 43 Chapter 1 Rb204.4 billion as of November 1992 to cover of the upgrading. It is expected that 70 percent of losses on passenger transport, but the government the fees will be collected in hard currency and the since decided to require MPS to subsidize subsidy is expected to be necessary only in its first passenger losses from freight earnings and has not year of operation. made any provision to finance rail passenger losses in 1993. This will undermine the railways' Reducing the Fiscal Burden of Transport Losses. long-term sustainability. The government is trying to cope with this fiscal * Airlines. The government responded to the crisis by allowing the enterprises to raise tariffs deteriorating situation of its domestic airlines by and by introducing criteria for limiting subsidies providing Rbl5.0 billion for airline fuel subsidies to specific expenses, such as fuel increases, rather in the 1992 budget. The 1993 federal budget also than subsidizing general losses at any cost. Freight includes Rb25 billion for subsidies for air transport tariffs have increased frequently in the transport to northern territories. These funds are last two years, by a magnitude of 81.1 for rail, 20 to be given to the local population rather than the for airline, and 28 for road transport airlines themselves, however, and are expected to (exhibit 1.19). The tariff increases are not at least triple during the year. sufficient to arrest the financial decline from high * Urban Transport. The 1992 budget included fixed operating costs and the increasing gap Rb8l.9 billion for intercity losses of urban between the timing of cost increases and tariff transport, most of which appears as unidentified increases. Other specific measures include: subventions to local governments and in subsidies * Railways. With respect to increasing losses to territories. MOT officials report total urban for suburban and commuter traffic, the transport losses for 1992 to be about RblO0 government has given responsibility for setting billion. Although the government allows local fares to individual railway administrations and authorities to impose municipal taxes to help cover local municipalities. Unfortunately, this can put an urban transport losses, MOT estimates that such even greater burden on individual railway taxes could only cover 40 percent of the losses. divisions which sometime lack the data or clout to The estimated urban transport losses for 1993 are push increases through municipal councils. expected to soar to Rbl trillion. 0 Airlines. The government has determined to * River Transport. The 1993 federal budget end tariff and fuel subsidies and to permit airlines includes Rb5 billion to support inter-regional river to raise tariffs to cover costs provided profit does transport and the funds are to be given directly to not exceed 20 percent of revenue. It is unlikely the shipping companies. the profit ceiling will be a problem, however, as = Ports. The 1993 federal budget includes Rb 1 Aeroflot estimated fares would have to be raised billion to provide subsidies for about 15 northern 3 to 4 times simply to cover operating costs, and ports where trade levels make it difficult for them 7.5 times to fully cover costs. Such tariff to be self-sufficient. increases will obviously decrease demand and * Maritime. The 1993 federal budget includes carriers are reluctant to try to recover capital costs Rb 1 billion for subsidies to support about 35 ships as well as operating costs lest traffic be reduced to in the ice breaker fleet. The subsidy is to pay the what are considered unacceptably low levels. difference between costs and revenues of the fleet; Aeroflot was attempting to balance flight tariffs are set by the state commission on tariffs. reductions and tariff increases in a manner that maintained about an 80 percent load factor, but * Air Traffic Control. The 1993 federal budget now that there are at least 174 domestic airlines, includes a first time subsidy for the first year's competition and fuel availability are driving the operation of a newly established air traffic control situation. MOT's budget request included (ATC) system. The system was previously run as provision to subsidize the cost of new aircraft for part of Aeroflot and has recently been separated Aeroflot international and domestic carriers, but into an autonomous entity. The government is in no such funds are included in the federal budget. process of upgrading the system and establishing Some sort of directed credits or loans for such user fees to finance the operating and capital costs purpose are undoubtedly under consideration. 44 Chapter I Exhibit 1.19 Transport Tariff Index Adjustments from 2 on 17 Magnitude of from 18 Magnitude of January May from 18 Increase from September Increase from Freight 1992 1992 May 1992 December 91 1992 December91 Railway 81.1' Aviation 5.0 2b 10 2.0b 20.0 Maritime 5.0 1.9 2 19 2.2 41.8 Internal waterway 3.5 1.7 3b 18 2 5b 45.0 Road 3.6 1.9 2b 14 2.Cb 28.0 from 2 on 17 Magnitude of Magnitude of January May from 18 Increase from from 18 Increase from Passenger 1992 1992 May 1992 December 91 Sept 92 December 91 Railway 13.5 Aviation 3 1.8r 1.5 3.0b 24.3 Maritime 2 1.5c 2.0 1.5 9.0 Internal waterway 2 1.5d 2.0 1.5 9.0 Road 2 2.0' 2.0 2.0 16.0 a. 53.9 for agricultural products c. from 1 April 1992 e. from 1 March 1992 b. free tariffs with rate of return of 35 percent d. from 15 March 1992 f. from 27 April 1992 Source: Data provided by Russian MOT to World Bank mission, November 1992. = Urban Transport. The government is trying 0 Waterborne Transport. River transport to reduce the problems of urban transport by operators have now been given complete freedom devolving responsibility for operations to local to fix freight rates and passenger fares. Since municipalities along with the authority to early 1992, freight rates have been increased 20 introduce a municipal tax to subsidize transport fold and river passenger traffic is rapidly losses. Some municipalities are raising fares, but declining. The 1993 budget includes Rb5 billion it is estimated that only about 15 to 20 percent of to cover inter-regional passenger river transport. costs are currently being covered through the fare International ocean transport has also been granted box. pricing freedom, but the situation is different with To date, however, losses continue and the cabotage (domestic coastal) trades. government has no system of performance criteria Water transport is not remunerative since in place that would help curb the increases. cabotage cargo volumes are generally low, and the Subsidies are based on unit costs per kilometer of trade flow is unbalanced. Subsidies may be transport service provided, whether empty or not, required to continue cabotage trades serving without relating them to improvement in outlying communities that have no other access to performance. MOT reports that losses find their the outside world and thus no way to receive way into the federal budget as subventions to the supplies. For this reason, the 1993 budget Federal budget in support of local governments. includes subsidies to ships serving the northern 45 Chapter I territories and about 15 northern cabotage ports. To the extent that DSCs are given to state Such subsidies now cover the difference between procurement agencies, the largest recipients of costs and tariffs and have not been designed with credits, a federal contract system is needed to bid an aim at encouraging efficiency and minimizing for needed services and supplies. Where DSCs costs. serve social objectives, such as support for wages in non-profit enterprises, the financial sector Improving Fiscal Governance of the should not be forced to assume government Transport Sector responsibilities. DSCs should be used as little as possible to Reducing subsidies and rationalizing the energy finance the restructuring or modernization of the sector are essential to a stabilization and economy's productive apparatus, as it is not restructuring program in Russia and, if evident that a recovery in output will require an implemented, will help to reduce the fiscal burden increase in investment. Such credit decisions of the transport sector. Neither macroeconomic should be based on specific proposals with stabilization nor enterprise restructuring can monitorable targets aimed at restructuring proceed without a rationalization of the transport enterprises, including downsizing or spinning off system and a reduction in the overall volume of its ancillary activities, and divesting them of state subsidies and transfers. This will require: (a) control. State owned enterprises to be privatized, downsizing and restructuring the system of closed or liquidated should be denied any access subsidies and directed credits to enterprises, (b) to DSCs. For example, DSCs should not be used enforcement of financial discipline on enterprises to purchase new aircraft or trucks for soon-to-be- remaining in the public sector, and (c) reforming privatized companies, to modernize and expand energy pricing and taxation, which will yield network capacity for railway freight operations or larger exports and the additional revenue for to expand the merchant marine fleet, unless their sustainable adjustment. full costs are passed on to the newly privatized 0 Limiting Directed State Credits (DSCs). companies. No directed credits should be provided DSCs represented about half of total bank credit to the trucking industry or to ports unless they are in 1992, yet mechanisms for determining the restructuring. amounts and recipients of these credits are largely * Eliminating Interest Rate Subsidies. arbitrary and non-transparent. In most instances, Subsidies to support interest rates should be no specific, credible conditions for enterprise eliminated entirely to all sectors and the Central reform are attached to the credits. DSCs are Bank's finance rate should be brought into line generally inefficient forms of resource allocation, with market rates. serving such purposes as compensating for price 0 Financial Discipline on State Owned distortions due to price controls, providing a Enterprises. On a macro level, government should social safety net, or perpetuating non-viable put ceilings on the total amount of subsidies and patterns of production. financial flows available to the whole state owned To the extent DSCs are aimed at compensating sector, and then establish borrowing limits and distortions from price controls, the best solution is monitor financial flows for each enterprise. To to liberalize prices. To soften the impact of losses help implement this strategy, the largest recipients that might result, financial support should be of assistance should prepare annual and quarterly granted to enterprises and conditioned to specific business plans, reflecting borrowing limits and reform measures. For example, where targets for financial results. A special entity liberalization of fuel prices to urban transport should be in charge of reviewing and approving would increase losses, grants should be tied to these plans and monitoring their implementation. performance improvement and cost recovery Public investment in these enterprises should, for measures. Subsidies to merchant marine fleets the most part, be limited to downsizing, passive operating in the northern zones, transport services restructuring, or preparing for privatization. to specific communities, for example, should be Railways, airlines, ports, and the merchant based on competitive bids. marine fleet are increasingly looking to the federal 46 Chapter I government for investment support. As the supported by the Ministries of Economy and government has decided to privatize airlines, Railway. Money has already been allocated for ports, and the merchant marine fleet, investment feasibility studies, although MOF reports that the support to these sub-sectors should be tied to government would permit construction only if it restructuring and privatizing efforts. Where were found to be self-sustainable. Such an privatization is complete, as in the case of the investment cannot be self-sustaining and should be merchant marine fleet, further credits should not discouraged at the outset, particularly in view of be extended. Recently the government decided to current economic conditions and overall priorities set aside foreign currency earnings of the for investment. All these investments are being merchant marine fleet to establish a fund for considered seriously by the government. If financing ship replacements. Even if such set funded, most donor agencies would consider them asides represented a good use of foreign currency, major deviations from the government's overall it is unfortunate that the government will reform efforts. determine which companies are to be eligible for the funds. The railway sector is a large recipient Accounting and Financial Management for which periodic plans and performance targets Information Systems. In order to improve should be set. Within that sector, there is scope transport, the government and transport managers for spinning off or privatizing ancillary activities, need to have a better understanding of when and and it is hoped that government assistance will be why they are losing money. Current transport linked to such reforms. accounting systems are a major obstacle to correcting structural and operational inadequacies. A Sound Investment Policy is Essential to Curb Enterprises cannot be restructured, costs cannot be the Growing Fiscal Impact of Transport. Care isolated and analyzed, and over investment cannot must be taken to guard against superficially be rationalized without properly structured attractive investments in new infrastructure and operational and financial information. equipment that cannot cover their operating and capital costs. MOT is attempting to limit transport Inter-Enterprise Debt. The government also investments by permitting airlines and ports to needs to assist in the restructuring by helping to corporatize, ultimately to privatize, and to seek straighten out inter-company debts and by letting financing for new capital investments from joint poorly performing enterprises go bankrupt so they ventures. Nonetheless, government has already do not add to the burden of transport enterprises. approved investments by airlines and railways for MPS spokesmen reported that railways were owed purchase of rolling stock, continued expansion of Rb8O billion, whereas other enterprises were owed rail lines, purchase of replacement aircraft, and only Rb4O billion. The problem is exacerbated by development of airports. Most of these the fact that a Central Bank freeze on credits in investments are being approved in the absence of account number 725 means that many enterprises an assessment of their costs and benefits. with positive cash flows have their funds tied up Other investments under consideration involve and could not pay their debts even if they were new generations of aircraft, elaborate air traffic willing to do so. An estimated RblO.5 billion in control systems, a new maritime fleet ill-suited to credit for all state owned enterprises is in this the market, and port investments that duplicate account.1 capabilities that were previously part of an integrated FSU port system. Even investments Major Restructuring of the Transport Sector Is considered for routine replacements of aging Needed. Actions taken by the government to date aircraft, river vessels, ships, and railway rolling are not likely to stem the growing gap between stock should be examined in the face of falling revenues and transport costs. The government demand and the need to put in place better needs to take a positive decision to resolve the mechanisms of financial control with parastatals. overall problems facing the transport sector. Another example is adoption by the government Regarding macroeconomic policies affecting fiscal of a decree to establish high speed rail, a project subsidies, directed credits, and lack of controls on 47 Chapter 1 the finances of state-owned enterprises, the 4. According to ATA's American Trucking measures are identical to those being applied in Trends, 1991-92, gross freight revenues in the other sectors throughout the economy. Regarding trucking industry in the U.S. totalled US$272 specific strategies for remedying the basic billion in 1990, representing 78 percent of the organizational, structural, and management nation's freight bill and 4.9 percent of GDP. problems of transport operating enterprises and Accordingly, total transport expenses amounted to government agencies, the measures must be US$349 billion and represented 6.3 percent of designed to the needs of the entity involved. GDP. In short, major efforts to reform and restructure transport enterprises are needed to control and 5. Sources: World Bank Development Report reduce their claims on state resources. Given the 1991, Table 30; L.W. International Financial volumes involved, there is no reason for ports, Research, Inc. [Bulgaria, Czechoslovakia]; The airlines, railways, or road freight transport to lose Economist, January 12, 1991, p 65. money and ways exist to keep urban transport losses to a minimum. On the whole, this reform 6. Booz-Allen & Hamilton/Travers Morgan. is best accomplished by privatizing as many EBRD Railway Sector Survey of the Railways of transport functions as possible and letting the Russia, Ukraine, Belarus, and Kazakhstan, marketplace bring expenses and revenues into London: July 1992, p 20. line. This is true even for urban transport, but a competitive structure can help keep subsidies to a 7. PlanEcon is a research and consulting firm minimum. founded in 1984 which provides investment Because of their vertical integration and advisory services, business consulting, and monopolistic nature, railways, airlines and ports economic information of Eastern Europe and the will require specific restructuring and reform to former Soviet Union. keep them from becoming a major burden. Their current structures are not suited to providing 8. With 90 percent of energy resources situated efficient and reliable service in a market economy, east of the Urals, and two-thirds of energy nor are their management incentive structures consumption in the European regions of Russia, geared to change. there has been a systematic growth in the flows of energy from east to west, amounting to 1.15 billion tons of standard fuel in 1990. In the future, these flows will increase to 1.3 to 1.4 billion tons Notes of standard fuel, which will demand a corresponding development in transport. See A. 1. Russian Economic Reform, Crossing the A. Makarov et.al., Concept of the Energy Policy Threshold of Structural Change, A World Bank of Russia in the New Economic Conditions Country Study, August, 1992; Table 2-3: Gross (Moscow: Energy Research Institute of the Domestic Product by Industrial Origin at Current Russian Academy of Sciences, September 1992), Prices, 1989-90. pp 4748. 2. Oxford Analytica Asia/Eastern Europe 9. Railway Sector Survey of the Independent States 12/31/92. Subject: Political and Economic of Russia, Belarus, Ukraine and Kazakhstan, Prospects for the Former Soviet Republics in EBRD Main Report, July 1992, p 21. 1993. 10. Railway Sector Survey of the Independent 3. Russian Economic Reform, Crossing the States of Russia, Belarus, Ukraine and Threshold of Structural Change, A World Bank Kazakhstan, EBRD Main Report, July 1992, p 9. Country Study, August, 1992; Table 2-3: Gross Domestic Product by Industrial Origin at Current 11. Russian Economic Reform, Crossing the Prices, 1989-90. 7hreshold of Structural Change, A World Bank 48 Chapter I Country Study, August, 1992; Table 2-3: Gross 16. The estimate represents 69 percent of the Domestic Product by Industrial Origin at Current consolidated net income for the entire railway Prices, 1989-90. system in the FSU, a figure based on percentage of traffic units hauled on Russian railways 12. Country Department III, Europe and Central compared to the total hauled throughout the Asia Region, Food and Agricultural Policy system. See exhibit 3.2 for details. Reforms in the forner USSR (Washington DC: The World Bank, September 1992), p 42. 17. Aeroflot Annual Report, 1991. 13. EBRD, Waterborne Transport Survey: Russian 18. Account number 725 is a special CBR off- Federation, Draft Final report, July 1992, balance sheet account for state owned enterprises NEDECO/HASKONING. pp 4-25. established to net out receivables against payables reported in the accounts of the banking system and intended to facilitate the settlement of inter- 14. SeaLand, a freight forwarding affiliate of the enterprise arrears. U.S. transport company CSX, has entered into a joint venture with MPS to operate the "Trans- 19. L. Kizilova, "Problems and Opinions: Siberian Express" Service. Conversion into Joint-Stock Companies. What's Behind It?" Interview with Russian Deputy Minister of Railways K. Kh. Salatov. Gudok, 11 15. BoozeAllen & Hamilton/Travers Morgan, September 1992, p 2. Translated as "Deputy Railway Sector Survey of the Independent States of Minister on Railway Economic Restructuring" in Russia, Belarus, Ukraine and Kazakhstan, FBIS, Central Eurasia (FBIS-USR-92-130) 10 December 1992, p 23. October 1992, pp 30-31. 49 2 Institutional Framework for Transport Before reviewing in detail the organization of each functions, the financial and operational scope of transport mode it is useful to have an overall which was orchestrated by the Ministry of perspective on the organization and the basic Planning. institutional issues that transport as a whole faces. * The freight segment of the transport plan This chapter provides that overview, with a brief was designed to rely primarily on railways to haul description of transport organization under the freight, except for short hauls and urban USSR and a discussion of the major institutional distribution. anomalies that remain to be resolved. Detailed * For intercity passenger movement, railways descriptions of the organizational schemes and and airlines were the principal modes, organized institutions for each mode are provided in as separate cabinet ministries. subsequent chapters. * All aviation services were provided by the Ministry of Civil Aviation (Aeroflot). Transport Institutions under the * All rail services for freight and passengers, Command Economy of the USSR including suburban commuter rail services and major metropolitan subway systems (metros), Prior to the breakup of the Soviet Union, annual were provided by MPS. central plans specified in detail the role of each * The waterborne sector was organized into mode of transport in the movement of passengers two ministries, the Ministry of Merchant Marine and freight. The plan provided the needed funding and the Ministry of River Transport. for investments in fixed facilities and operating * Road construction was provided by the equipment, established tariffs for passengers and Ministry of Construction and the road ministries freight, and coordinated detailed operating of the republics. schedules for the movement of raw materials, * Commercial road transport was provided by foodstuffs, manufactured goods, and defense the Ministry of Automotive Services. shipments. This approach to the organization and operation of the economy obviated the need for an * In addition, most ministries, including those intermediate MOT to coordinate the planning, for Agricultural Machinery, Agriculture, Energy, investment, regulation, administration, and Industry, Finance, Interior, and Defense and operation of the different elements of the transport Military Industry had transport functions that did, sector. and still do, consist largely of truck transport provided by "own-account" entities - wholly- The main elements of the transport sector were owned subsidiaries of non-transport-sector fragmented into a variety of ministries that carried parastatal enterprises in sectors such as agriculture out independent transport or transport-related and construction. 51 Chapter 2 Exhibit 2.1 Structure of Transport within the Russian Governument PRESIDENTrs Policy Advisory LOfice of tho PMsident fParMiamentary Commiiee on l Council l PolicyAdvisoryCouncil aTransport Telecommunication, bSpace| PRIME MINISTER Oufice on the Prime Minister Deputy Prime Minister Aor Transporo Sector Asfifs c MRnistry of Ma Ms otry of n Tnstsp o TTlecom- f Transport ai wa s -municatlon | St,t leftl the State Committee for . or Indus"to n C mtsthatila Adv. Com. t ort seCtor t Adv. Com. for efetve the Adv. Com.tor (exhibitr 21Adv. Com. aor Standards & ed n e itlerft Dethe an Cofs larn Me,alurgicp Chernical & Mensurements w omithr lpial stock o enst Erp ises t Industhy Oll Industry coiao waoa to tonverslod Source: RussiT) Ministry of Transpost. The legacy of the command economy for the MOT. In addition to MOT and MPS, there are transport sector is twofold. First, it left the two State Committees and seven Advisory government completely unprepared to plan and Committees that still carry out functions related to manage a transport sector that could effectively the transport sector (exhibit 2.1). There are also serveca market-based economy. Second, itleftthe a number of large, independent, parastatal government with a large capital stock of enterprises; these will be addressed as the infrastructure and equipment, much of it in po ha andeatment toa oordiek for each mode is repair, little of it well suited to effective described. coordination with other transport modes, and all of it (except railways) dramatically underutilized The Minisay of Transport compared to the standards of the world's best practices. The Ministry of Transport (MOT) was formed from the shell of the former Ministry of Current Transport Institutins of the Automotive Services, which -given the massively Russian Federation increasing role that road transport is likely to play in the reformed Russian economy - may be In the wake of the dissolution of the USSR and fortunate. MOT's charter extends to all of the decision to shift to a market economy, the transport except railways, although the Ministry Russian Federation completely restructured the has a depar-tment to coordinate rail transport institutional framework of its transport sector. policy. With the exception of railways which remained as a separate and independent MPS, all the single- The Ministry consists of three basic mode ministries were incorporated into a new organizational clusters: (a) administrative 52 Chapter 2 departments organized along functional lines to passenger movement by road, through an umbrella exercise authority for regulation, enforcement, organization called Rosavtotrans, the successor to training and professional development, research the former all-union organization Soyuzavtotrans. and technology development, international affairs, Rosavtotrans comprises the 78 subsidiary intermodal transport, and labor relations; (b) small organizations that made up the Russian part of modally-based groups, vestiges of the Soyuzavtotrans. These 78 organizations, which headquarters of the former independent ministries, were essentially motor transport organizations at which serve as policy advisers to the Minister of the oblast level, in turn controlled some 2,500 Transport and his Deputy Ministers; and (c) large, separate enterprises and employed 1.3 million modally-organized operating administrations that people. Since MOT was built on the foundation of actually carry out the transportation function the former Ministry of Automotive Services, the (exhibit 2.2) In discussions with Ministry officials, Ministry's leadership and core administrative MOT's organization was likened by one to a staffs tend to have a more advanced understanding flower, in which the office of the Minister, the of motor transport issues and operations than of policy advisory staffs, and the functional staffs other transport modes. With this greater form the center, and the large modal operating understanding, however, comes some degree of administrations make up the petals. commitment to preserving traditional patterns of The USSR's command economy was organized organization, operations, and central direction. and directed through the Ministry of Planning For example, MOT has opposed plans to privatize (Gosplan), which coordinated the interaction of road transport enterprises, which have been production and service enterprises to carry out the supported by the State Commission for the economic activity in all sectors called for by the Management of State Property (GKI), to state. The large operating administrations of MOT incorporate auctioning off some fraction of the are large, virtually autonomous, vertically- fleets to provide a basis - perhaps under current integrated monopolistic corporate structures of the circumstances the only affordable basis - for type that were the principal institutions through starting new, independent, competitive trucking which the command economy of the USSR was enterprises. Resistance to this plan by MOT is in structured and operated. It is important to set forth part responsible for the slow pace of privatization a brief account of their structure for two reasons: of road transport enterprises. (a) to understand their massiveness, complexity, and the obstacles they present to change; and (b) Within the scope of road transport is urban to understand the challenge that faces the new public transport, which has also been part of the MOT as it tries to consolidate effective power organizational structure of Rosavtotrans. Policy over the various elements under its jurisdiction. proposals being considered by the Ministry While most of the modal monopolies have been at recommend that urban public transport assets be least formally integrated into the MOT, some of removed from joint passenger-freight these organizational remnants of the command organizations, except in cases involving small economy have proven too politically powerful to rural enterprises with only a few trucks and buses. be dismembered; it remains to restructure them A key to this step is the development of an into smaller, competing enterprises. understanding by MOT of the fundamental difference between trucking and urban public Railways. The railway system is the only mode transport operations and the necessity to separate over which MOT does not have at least nominal them if each is to be effectively managed. jurisdiction. Russian railways are still organized under MPS. MOT has a small planning or policy Road Construction. In the USSR, a Ministry of advisory staff for railways, but it does not Construction and road ministries in each republic exercise any real power over the railways. carried out road planning, construction, and maintenance. In 1990, Russia created a single Road Transport. The Ministry has organized agency, Rosavtodor, to construct and maintain road transport, which includes both freight and roads and also to be the organizing entity for the 53 Chapter 2 Exhibit 2.2 The Ministry of Transport 2~~~~~~~~~~~~~~~~~~~~~~~~2 o ~~~~~~~~~~~~~~~~PE I z i-I i 2 S S W L n - 5 4 i -0 E E 2~~0 M 11<7J L 91 u -a Source: Russian Ministry of Transport.~.~j 54~~~~~~~~~~~~~~~0 Chapter 2 road construction industry. The conflict inherent taken to restructure the monolithic Aeroflot. The in this form of organization soon became evident. restructuring of Aeroflot into appropriate and When MOT was formed, responsibilities for road separate segments is a major challenge facing the planning, construction, and maintenance were government and MOT. A new Air Traffic Control separated from the road contracting industry and (ATC) authority has been formed to govern air incorporated into the Ministry as the Federal traffic throughout Russia. Airlines are being Highway Department (FHD). Rosavtodor became separated from airports and permitted to privatize a joint stock company owned by the construction and compete with each other. Aeroflot and maintenance companies that were formerly International has become a joint stock company to part of it, and it retains - with their support - be privatized in three years. Domestically there certain functions such as marketing on behalf of are now 174 carriers, many consisting of the contracting industry. Rosavtodor, in its new regionally based aircraft under the old structure, role, is likely to continue to play a major role in that are now in the process of corporatizing and determining the structure and function of the road completing with each other. The system is still in contracting industry, almost certainly serving as a the process of evolving as described in Chapter 8. barrier to the reform of contracting procedures Besides the massive political influence of and improvements in construction techniques. Aeroflot, the complex financial and managerial FHD and the oblasts carry out road maintenance interrelationships of the different components of with autonomous state-owned agencies called the aviation system also present major obstacles to uprdors at the Federation level and regional road effective restructuring of the monopoly. administrations (avtodors) at the oblast level. Uprdors maintain about half of the federal road Waterborne Transport. The historic structure of network and regional road administrations dual ministries for merchant marine and river maintain the remaining half, plus all regional transport under the USSR has been reflected in the roads. A major obstacle to rapid privatization and new MOT by creating a department for each. The the organization of the road contracting industry Department of Marine Transport incorporates the has been opposition from some regions in functions of the former Ministry of Merchant separating administrative and executing functions Marine (MINMORFLOT) and also supervises the for construction and rehabilitation projects. At ports that were part of the maritime transport present there is no government policy to privatize industry. The new department, however, has less routine maintenance activities, given the monopoly direct authority and fewer financial resources than position of most of the routine maintenance had MINMORFLOT to finance and control the agencies. activities of the maritime sector. Aviation. The Ministry of Civil Aviation was the Because river transport in the USSR was ministry to which Aeroflot reported in the FSU. handled regionally, the new Department of River Aeroflot was the vertically-integrated, multi- Transport is a descendant of the Russian Ministry enterprise, monopolistic holding company that of River Transport, which was succeeded for an included virtually the entire civil aviation sector interim period by Rosrechflot, a Russian agency and which operated as the largest airline in the formed to administer Russia's river transport world. In addition to airline operations, Aeroflot sector. Rosrechflot has been formally dissolved was also responsible for air freight service and and its functions absorbed into the Department of development and operation of airports and the air River Transport. Despite these formal changes, navigation and air traffic control systems. At the however, the old apparatus that mobilized state regional level, Aeroflot operated through a series resources behind ill-structured and poorly- of regional directorates based at major city managed industries is still in place. Plans for airports throughout the republics. large public investments in merchant and river The key elements of the Ministry of Civil ships and ports should be financed through the Aviation have been integrated into the Aviation private sector, but initial plans for privatizing and Department of MOT, and some steps have been restructuring national and river ports are under 55 Chapter 2 attack by interests that seek to preserve them as managing the transport sector. This means that the uncompetitive, worker-owned monopolies. The interaction of the Ministries of Economy and Ministry faces major challenges and the Finance with the Ministries of Transport and institutional framework needs basic improvement Railways has not yet been structured to make and reform. rational plans and decisions about the most efficient manner in which to allocate funds for Issues Facing the Ministry of Transport investment and operations among the various modes of transport. Given the revolutionary change in the structure Another fundamental problem is that the role and function of the transport sector in the last two that the government of the Russian Federation will years, it is not surprising that the new Ministry is play is not yet settled in the transport sector in facing fundamental problems from both internal general as well as in each of the various transport and external sources. The newness of the Ministry modes. This means by definition that regional and is challenged by strong residues of the old local roles also remain to be finally decided. command economy. The modal administrations In this environment, it is difficult to resolve into are much more in control of their operations, some final form the structure and function of the plans, and destinies from the financial, planning, various government organizations needed to and operational standpoints than are the Minister handle the transport sector at all levels. As a of Transport and his functional and modal policy result, a great deal of activity is still taking place advisory staffs. within MOT that is, by the standards of most market-based economies, inappropriate for the As not only a new but a new kind of cabinet government or at least for a central government. ministry for Russia, MOT is charged with a set of responsibilities for which effective institutional The Ministry's leadership clearly recognizes this capabilities have not yet been developed. The situation and has expressed an interest in obtaining missing or deficient institutional features or technical assistance from the World Bank in the capabilities include: broad areas. A A clear vision of its proper role and 0 Creating a normative (policy), legal, and responsibilities, including a proper concept of the regulatory framework for Russia's transport sector fundamental role that the private marketplace suited to the needs of a market economy. should play in the transport sector as a whole, and * Making those modifications necessary in the the governmental framework that is necessary to organizational structure of the transport sector at support effective execution of this role. all levels of the government, to equip them to * A clear understanding of the structure carry out the requirements of the new normative required for each of the modes of transport to be and legal framework. competitive and efficient in a market economy. * Creating a program of professional * An internal organization that can create and development and training to provide the education manage appropriate government policies, and skills that the transport sector's management programs, and regulations to achieve the transport and workforce needs to provide efficient and sector structure and performance required. responsive transport services for Russia's * Capability for coordinated planning and economy. budgeting of transport sector investments and Ministry operations. Ministry of Railways * An expanded Ministry structure that includes supervision over railways, construction, and other In the opinion of some Russian officials, MPS is incidental functions essential to the transport second in importance among ministries in Russia mission. only to the Ministry of Defense. Except for In terms of the framework in which MOT pipeline transport, railways historically moved operates, there does not yet exist a coherent over 90 percent on a tkm basis of intercity freight, governmental process for planning, financing and as well as provided indispensable transport for 56 Chapter 2 Russia's armed forces. Viewed by many as the the world that have undergone the kinds of "blood vessels of the country" its importance economic transitions that Russia is now among transport-related ministries under the undergoing. command economy was paramount. Following the breakup of the FSU, it was decided after much Improvements in the Transport debate that railways were too important to be Institutional Framework made subservient to MOT. Railway transport consequently, is the only mode of transport that In respect to the institutional framework of has survived with its independent ministry-level Russia's transport sector, there will be prolonged status intact. debate over both: (a) the nature and timing of With the disintegration of the USSR and the changes needed, and (b) the means through which integrated system of all-union railways, the size of such changes are implemented. The need for the Russian MPS has diminished somewhat. significant changes, however, seems to be widely Fifteen of the original 32 railways are now in recognized within the government. Among the independent republics and Russia's 19 regional types of changes that have been discussed or railroads have begun to exercise more independent proposed in recent months are: authority over their own assets, operations, and * How to restructure airlines, railways, and finances. urban transport to stem rising losses. * How to privatize the transport sector's Despite this erosion of its direct authority over vertically-integrated monopolies into properly- the operating railroads, the power of MPS appears sized and competitively-structured enterprises. to remain essentially undiminished. In part this is * How to establish a coherent process for because railway officials have successfully argued managing the transport sector, to include setting their role is so critical that the government should objectives, deciding government and private sector leave the business of running the railways to the roles, determining government roles at the federal, experts. No one at the highest levels of the regional, and local levels, and creating processes government questions whether shifts in the for planning and investment. economy call for a reexamination of the railways' 0 How to develop a new framework of the role. Officials at the Ministry of Economy, for government policies, laws, and regulations, example, remain convinced that when the current perhaps codifying them in a basic transport act. economic turbulence is stilled, the railways will 0 How to restructure transport institutions and regain their high traffic levels and their administrative processes to carry out these tasks. overwhelming freight market share, and that the Strategies that the government might consider rest of the surface transport sector will remain in for designing and implementing these changes will its previous subordinate state. This view is be discussed at the end of each of the following directly contrary to experience in countries around chapters. 57 3 Railways The Russian Railway System based. Railway operations were to be coordinated among the Republics by the CIS Railway Russia's railway system makes up the bulk of the Transport Council. It was hoped the freight wagon world's largest and most intensively operated fleet and containers could remain as a commonly railway system. The former All-Union or Soviet owned and operated pool for all the new national Railways (SZD) was operated as an integrated railways. In practice, however, the hoped-for system across eleven time zones over 148,000 integration is in danger of breaking down amid route kilometers with 62,000 locomotives, 1.5 increasing complaints from other republics about million freight wagons, and 56,000 passenger sending rolling stock into the "black hole" of coaches. SZD carried half of all the world's Russia. Reluctance among newly-established railway freight traffic and about one-fourth of all railways in some republics to finance wagon the world's passenger traffic. It had the highest repairs or make other capital investments that traffic density of any railway in the world. If its disproportionately benefit others is fuelling a services were priced at rates charged by U.S. move toward greater independence from Moscow. railways in 1990, the total revenue would have In November 1992, the CIS council approved a been about US$100 billion. (By comparison, all formula by which the freight wagon fleet would Western European railways generated only 3 be divided among the Republics, and procedures percent of the world's freight traffic and 13 are now being discussed to divide revenues and percent of passenger traffic. The United States and charge demurrage for interchanged traffic.' Canada combined carry about 23 percent of The Russian railway system now consists of 19 freight traffic, but generate only about 1 percent regional entities operated as an integrated system of passenger traffic.) Traffic density per route under the Ministry of Railways (MPS), established kilometer was 51 million gross tons in 1990. by Presidential decree in February 1992 as the Daily train density averaged 40 trains for freight legal successor to SZD. Its responsibilities are trains and 20 for passenger trains. The heaviest limited to the ownership and operation of railways sections carried over 250 million gross tons within the Russian Federation, two of which were annually and 300 trains daily. created since the break-up, in Sakhalin and With the dissolution of the FSU, SZD was Kaliningrad. The 19 railways within Russia broken up. Independent railways along republic represent roughly 60 percent of the former SZD. lines were created in February 1992. Except for Fifteen other railways formerly belonging to SZD containers and the fleet of freight cars, all railway but now outside the territory of the FSU are installations and assets were allocated among the national railways within their respective republics. new administrations, largely according to property Of the 32 regional railways, 17 were in Russia, 6 location. Locomotives, passenger coaches, and in Ukraine, 3 in Kazakhstan, 2 in refrigerated cars were allocated according to the Georgia/Armenia, and 1 each in Belarus, the location of the depot where the rolling stock was Baltic States, Moldova and Central Asia. Each of 59 Chapter 3 Exhibit 3.1 Coverage and Performance of the Former USSR Regional Railways Compared to Other Major Railwatys, 1990 Percent Republic? Percent Percent of Percmt Percent Percent Republil 'of Rusia of USSR Tkm Ruus Of USSR Pas-ku of Russia of USSR Country Railway Name Line Km Total Toa] (mDiran) Ta]l Ta] (million) Tob TOa Russa October 10,186 11.85 6.91 160,982 6.38 4.33 42,547 15.57 10.20 Moscow 9,360 10.89 6.35 178,303 7.07 4.80 80,544 29.43 19.31 Gortly 5,673 6.60 3.85 191,926 7.61 5.16 20,987 7.68 5.03 Nortuem 6,027 7.01 4.09 170.977 6.72 4.60 12,091 4.43 2.90 North Caucasus 6,486 7.54 4.40 142,884 5.66 3.84 17,471 6.40 4.19 South East 3,648 4.24 2.48 144,906 5.74 3.90 10,044 3.68 2.41 Volgs 4,098 4.77 2.78 74,292 2.94 2.00 7,170 2.62 1.72 Kuibi'hev 4,835 5.62 3.28 178,457 7.07 4.S0 14,090 5.16 3.38 Sverdlovsk 7,070 8.22 4.80 186,610 7.28 4.94 15,514 5.68 3.72 Sowtb Urals 4,937 5.76 3.35 258,374 10.24 6.95 10,844 3.97 2.60 West Siberia 4,181 4.86 2.84 232,994 9.24 6.27 12,999 4.76 3.12 Kemerovo 1,916 2.23 1.30 68.065 2.70 1.83 4,005 1.47 0.96 Krasnoyark 3,167 3.68 2.15 112.317 4.45 3.02 5,861 2.15 1.40 East Siberia 2,665 3,10 1.81 132,389 5.25 3.56 6,069 2.22 1.45 Tran Baulb 3,436 4.00 2.33 163,171 6.47 4.39 5,256 1.92 1.26 Far Esut 4,432 5.16 3.01 93,037 3.69 2.50 6,628 2.43 1.59 Buikal 3,853 4.48 2.61 36,231 1.44 0.97 1,056 0.39 0.25 Tdal Amur(BAM) 85,970 100.00 58.34 2,522,915 100.00 67.87 273.176 1O0.00 65.48 .................................................................................................................................................................................................................................. Ukn]ne Soutb Wet 4,681 3.18 94,680 2.55 24,074 5.77 Lvov 4,521 3.07 50,342 1.35 8,654 2.07 Odesr 4.242 2.88 78,925 2.12 10,744 2.58 Southern 3,715 2.52 82,449 2.22 17,538 4.20 Dnepr 3,254 2.21 88,378 2.38 11,973 2.87 Donetsk 2,903 1.97 93,469 2.51 9,015 2.16 Toal 23,316 15.81 488,243 13.14 81,998 19.66 .................................................................................................................................................................................................................................. Kxmikhan W. Kanidrktan 3,817 2.59 116,076 3.12 7,542 1.81 Taelinnaya 5,750 3.90 175,767 4.73 5,240 1.26 Alma Aba 4,581 3.11 115,125 3.10 6.951 1.67 Total 14,148 9.60 406,968 10.95 19,733 4.73 .................................................................................................................................................................................................................................. Ceorgil Azerbaijn 2,137 1.45 37,076 1.00 1.827 0.44 AnnenaI Trans Caucasus 2,346 1.59 15,479 0.41 2,813 0.67 Total 4,483 3.04 52,555 1.41 4,640 1.11 .................................................................................................................................................................................................................................. Etonia, Latv, Lihwan Baltic 6,278 4.26 45,530 1.22 11,778 2.82 .................................................................................................................................................................................................................................. BeLau Behas 5,507 3.74 75,428 2.03 16.852 4.04 UrbekWwndTwkrnentnrTradjWdanf Kyrgya- Central Asian 6,330 4.30 110,660 2.98 7,365 1.77 ................................................................................................................ .................... .............................................................................................. Moldeva Moldova 1,32S 0.90 0.40 1,626 0.39 Total for the System 147,360 100.00 3,717,081 100.00 417,168 100.00 U.S. BurlingtonNorthera 37,438 43.55 25.41 345.488 13.69 9.29 Conrail 20,690 24.07 14.04 124,982 4.95 3.36 US Al Clam 1 193,158 224.68 131.08 1,530,743 60.67 41.18 W. Germany German Federal 27,045 31.46 18.35 61,357 2.43 1.65 43,560 15.95 10.44 RR France SNCF 34,070 39.63 23.12 49,677 1.97 1.34 63,761 23.34 15.28 Cres BrEamn Britisb Rail 16,584 19.29 11.25 15,986 0.63 0.43 33,191 12.15 7.96 Sveden Swedish State RR 10,081 11.73 6.84 18,756 0.74 0.50 6,076 2.22 1.46 Indla Indian RR 62,637 72.86 42.51 229,601 9.10 6.18 295,644 108.22 70.87 China Ministry of RR 53,378 62.09 36.22 1,060,100 42.02 28.52 263,530 96.47 63.17 Soume: EBRD/Booz * Allen Study, p 67 and World Bank Ralway databae. 60 Chapter 3 Exhibit 3.2 Soviet and Russian Railway Categories and Employment Levels (thousands) Category 1989 1990 Transportation (operations) 1,813.6' 1,862.5 Capital repair (track and buildings) 117.5 108.8 Rolling stock repair by MPS (not in factories) 599.4 598.9 Loading/unloading of cargo for customer account 48.3 47.4 MPS headquarters staff 2.2 2.3 Scientific Research Institutes 6.6 6.4 Specialist training facilities 34.2 34.2 Schools and kingerdartens 174.7 177.1 Hospitals 224.8 226.0 Central procurement and supply department 1.0 1.0 Basic rail activity (subtotal) 3,022.3 3,064.6 Main rolling stock repair and spares production 153.5 146.8 Plants of *Soyuzhelavtomatizatsiya- (automation) 13.4 13.0 Plants of *Spetzhelbeton- (concrete sleepers) 9.9 9.6 Plants of *Remputmashb (track repairs) 5.8 5.7 Main department for containers 1.4 1.4 Plants for electrification and electric supply 1.3 1.2 'Transgossnab- (all union supply organization) 0.6 0.5 *Kuskovo- (producing lubricants) 0.1 0.1 Railway shops and depots 29.8 28.6 Metropolitan shops 1.3 1.3 MPS manufacturing enterprises (subtotal) (217.1) (208.2) Metropolitans 46.9 47.7 *Glavpromzheldortrans- (NPS on industrial railways) 53.2 53.0 Other organizations 15.9 15.5 Construction activities 86.1 78.1 Project-related organizations 12.6 12.2 Supply services for employees (groceries) 237.8 234.5 Railway restaurants 81.5 79.7 MPS Total 3,773.4 3,793.5 Russian Railway Employment Categories, 1992 Basic activity (operations) 1,635.0 Trade and social nourishment (railway restaurants, etc) 141.0 Education 137.0 Health care 126.0 Industry 110.0 *Promzheldotrans- concern (MPS on industrial railways) 38.0 Construction 29.0 Operational activities by specific function 1,351.0 Locomotive operations 324.0 Capital repair (track) 276.0 Wagon operations 193.0 Passenger operations 169.0 Transpon operations 145.0 Freight and commercial work 102.0 Signaling, communications and computer technology 87.0 Electrification and electric supply 55.0 Total employment 2,240.0 a. Note that these numbers are slightly different from the amounts of 1,794.8 and 1,873.4 for the years 1989 and 1990, respectively, shown i Statistical Repon on Operation of Railroad Transport published by the USSR Transportation Ministry. Operational activity empoyment levels fo the 17 Russian Railways in 1990 amounted to 1,129.0 Sources: Data provided to World Bank mission by MPS, November 1992; Railways of the Russian Federation for 1991 and 1992, published by TsNIITEI, MPS' Central Scientific Research Institute of Information and Technical Economic Research of Railway Transport. 61 Chapter 3 the 19 Russian regional railways is a "geographic information openly about its operations or monopoly", without competition for traffic problems. (map 1). Exhibit 3.1 lists the former USSR railways by name and shows their relative Ancillary Activities. As in most socialist importance in terms of percentage of the total countries with planned economies, SZD was far system's traffic levels. from being just a railway. Nearly 500,000 of SZD's 3.8 million employees, worked in schools, Organization of MPS. MPS is an independent hospitals, and restaurants for railway employees, ministry, reporting directly to the Council of and another 200,000 were engaged in activities Ministers. MPS has its own budget and policies industrial activities, mostly manufacturing. and is responsible for coordinating all railway Essentially none of these employees would be operations as well as for determining rail policy, found on a railway payroll in the west. It is the legal framework governing railway operations, questionable whether many of the central functions and the planning and allocation of investments - including many administrative functions, including construction of new railways. MPS itself manufacturing, research and other overhead is a coordinating body with a staff of about 2,300. activities - would be sustainable if the regional About 2.24 million railway employees, of whom railways were asked to pay for them directly. about 1.6 million are actually engaged in railway operations, work for the regional railways, which Responsibility for Operating the Urban Subway typically enjoy great independence from the center System. Until 1992 MPS was responsible for (exhibit 3.2). operating subways or metros in 13 FSU cities. Approximately 48,000 MPS employees were As a coordinating agency, MPS (a) defines associated with this effort. The decision to make general system policies and technical standards, MPS responsible for all the urban metro systems (b) sets tariffs, (c) collects and apportions in the country was made with the belief that revenues among the regional railways, (d) profits, primarily from freight, could subsidize schedules trains system-wide (up to one year in metro losses. Following the breakup of the FSU, advance!) (e) coordinates investment planning in 1992 it was decided that responsibility for the among the regional railways (f) allocates centrally metros should rest at the municipal level, and the controlled investment funds, and (g) generally transfer has been completed. serves as the interface between central government and the railway system. MPS is also the single Industrial Railways. Besides the MPS rail buyer of rolling stock, track machinery, and other system, some 151,000 km of industrial or "own equipment for the individual railways, on a account" railways exist throughout the CIS, contractual basis with the railways financing their making the entire CIS track length about 300,000 own purchases.2 km, more than the paved highway network in At the time of its creation, there was Russia. Many industrial lines are internal to the considerable discussion of having MPS become an industries they serve; others are shuttle lines operating entity reporting to MOT. On the between raw materials, plants, or main railway grounds that the railway system was too important lines. The industrial railways hauled some 11.4 to the country to be made subservient to another billion tons in 1990, but the average length of ministry, or put on a level with other transport haul was only 7 km. modes, MPS argued that its ministry status should be continued. Although MPS' view ultimately Traffic Levels and the Importance of prevailed and it does not report to or through Rail to the Economy MOT, the responsibility of coordinating rail policies within the overall government transport 7he Role of Rail in the Economy. MPS has long policy context rests with MOT. MOT's ability to played a critical role in the Russian economy, far carry out this coordination is severely limited more than would have been the case in a market because MPS has no incentive to share economy. Although a significant amount of non- 62 GDP at Freight Passenger Kmn of Km of Transport tm Constant Freight Freight Revenue Passen Revenue Line Line MPS Total Operations Ruble GDP2 Tons tkmn Rubles -gers Pass-km Rubles Total Electric Employees Employees Year (billions)' Deflator (000) (000,000) (000,000) (000) (000,000) (000,000) (000) (000) (000) (000) 1940 605 421 100 106.1 1.9 1,369 1960 1,884 1,504 2,231 176 125.8 13.8 1,916 0 19703 382 2,895 2,495 3,354 274 135.2 33.9 1,889 1980 648 0.955 3,728 3,440 4,072 342 141.8 43.7 3,852 2,074 C: 1981 673 0.966 3,762 3,503 3,995 2,101 1982 699 0.991 3,725 3,465 4,020 2,114 E 1983 730 0.993 3,833 3,600 4,161 362 143.6 46.8 4,014 2,114 1984 760 1.000 3,906 3,639 4,161 364 144.1 47.9 4,004 2,095 1985 777 1.000 3,951 3,718 14,454 4,166 374 3,112 144.9 48.4 3,985 2,077 1986 803 0.968 4,076 3,835 14,893 4,345 390 3,283 145.6 50.6 3,888 1,993 1987 825 1.000 4,067 3,825 15,016 4,360 402 3,403 146.1 51.7 3,816 1,870 1988 872 1.003 4,116 3,925 15,393 4,396 414 3,484 146.7 52.9 3,795 1,847 1989 898 1.029 4,017 3,852 15,004 4,323 411 3,468 147.4 53.9 3,800 1,873 1990 880 1.087 3,872 3,717 20,198 4,274 417 3,574 147.5 54.3 3,781 1,859 1991 730 2.069 3,574 3,365 33,703 3,527 383 5,157 147.5 55.2 3,744 1,877 1992 478 36.305 1,632 1,966 438,000 2,372 253 21,000 87.5 37.8 2,240 1,635 1. GDP at market prices in constant 1987 rubles. 2. Based on GDP at current and constant prices, base year 1987. 3. Transport operations employees (000) in years: 1971 1,908 1974 1,948 1977 1,985 1972 1,922 1975 1,958 1978 2,016 1973 1,935 1976 1,966 1979 2,030. Source: Historically Planned Economnies - A Guide to the Data by Paul Marer, et.al., World Bank 1992, pp 206. 1990 (-2.0 percent) and 1991 (-17 percent estimates from Economy of the Forner USSR in 1991, IMF Economic Review, April 1992, Table 1, p 41. Chapter 3 Exhibit 3.4 Russian Railways: Indexed Traffic Trends, 1980 to 1992 (1988-100) 120 100e 4 0 . ................................................................................................................................... ...............................................X 60 2 0 . ................................................................................................................................................................................ 0 1 I 1 1 1 I 1 1 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Year el Ton-Km Pass-Km GDP (FSU) Sources: Russian data: Statistical Report on Rallway Operations for 1990; Railways of the Russian Federation, 1992 water traffic has been shifted from rail to pipeline point. On a percent of tkm basis, rail's dominance following the growth of oil production, rail is even greater because the average length of haul carried 98 percent of the land tkm in 1960, and for rail is almost 1,000 km, whereas the average still carried 96 percent in 1988 (exhibit 3.3). length of haul for trucking is barely 30 km. Only MPS's traffic has grown more or less directly for oil products is rail's tkm share less than its with the economy (exhibit 3.4). tonnage share.3 MPS freight traffic, which amounted to 1.95 The tkm measure adds particular emphasis to billion tons on the broad gauge network in 1991, the critical role of the railway in the functioning makes up the for-hire, or common carrier, portion of the Russian agricultural and energy systems. of rail freight traffic. Industrial railways that haul More than 90 percent of the tkm of Russian their own freight carried 5.789 billion tons, or agricultural products move by rail, whereas only almost three times the common carrier tonnage, in about 25 percent of the tonnage recorded moves 1991. For all practical purposes, surface by rail. This is because virtually all trucking transport, excluding pipelines, in Russia is rail, tonnage is counted repeatedly as it moves from and will remain so for the foreseeable future farm to storage to processing to rail, and from rail despite an expected shift to road transport. to market; rail tonnage is usually only counted once. Virtually all long hauls of agricultural Freight Traffic. With some exceptions, rail commodities go by rail.4 Rail's predominance in carries at least 60 percent, and often more than 80 Russian energy transport is even greater, with percent, of commodity tonnage (exhibit 3.5). over 97 percent of coal tkm moving by rail, and Petroleum travels primarily by pipeline: about 25 percent of petroleum tkm, compared agricultural grain and milling products account for with about 3 percent in the United States. The much of the trucking tonnage, since trucks Russian economy would literally not be able to provide the first journey from farm to collecting produce electric power or most of its industrial 64 Chapter 3 products if the railway ceased to function the drop in overall economic activity in Russia, properly. The efficiency of railway transport will but also presage a changing economic role. play a key role in the ultimate efficiency of these Experience in other countries passing through sectors. similar periods of restructuring and transition has SZD generated 23 percent of the world's rail shown that socialist economies use too much passenger-kilometers (pass-km) making it the transport, and much of the excess is in the rail largest rail passenger carrier in the world, with mode. Central and East European (CEE) countries almost twice the volume generated in Japan, the are experiencing a drastic drop in rail demand largest passenger carrier in the developed world. compared with Germany and France. Use of MPS is still the world's largest passenger carrier, transport per U.S. dollar of GDP supports the with over 15 percent of the world's rail pass-km same conclusion (exhibit 3.6). in three separate markets: * Intercity passenger services, for which MPS Short Haul Truck Transport. Far more rail had one of the longest average trip lengths in the traffic is carried over relatively short distances in world and was the largest carrier in passenger Russia (nearly 18 percent of tonnage moves less volume. than 100 km) than elsewhere, including China or * Suburban passenger services. the United States (exhibit 3.7). As a market * Commuter services, which in the past economy develops and shippers become free to included operation of metro subways, now choose modes of transport, short-haul rail traffic operated by their respective municipalities. will be highly vulnerable to competition from trucking, which offers door-to-door service, more Rail Traffic in Decline. Rail traffic in Russia flexibility, and greater reliability. Moreover, it is and throughout the CIS has fallen precipitously probably unprofitable for rail to carry such short from its 1988 peak. Since then, freight volumes distance traffic, a conclusion railways will are about 26 percent lower, and passenger traffic undoubtedly reach when they measure market has declined by 17 percent. These declines reflect costs and revenues according to lines of business. Exhibit 3.5 Percentages of Common Camer Shipments by Type of Transportation (tons) Inland Freight Category Rail Shipping Water Trucking Pipeline Total Coal 90.1 1.3 2.3 6.3 100 Coke 95.8 1.9 0.3 2.0 100 Petroleum products 32.8 7.7 2.9 4.7 51.9 100 Iron & manganese ore 93.2 3.6 2.4 0.8 100 Nonferrous ore & sulphur raw materials 76.0 6.4 3.0 14.6 100 Ferrous metals 75.9 3.6 1.4 19.1 100 Chemical & mineral fertilizers 88.0 4.1 3.0 4.9 100 Cement 85.6 1.7 1.1 11.6 100 Forest products 60.0 4.4 24.4 11.2 100 Perishable food products' 95.0 4.9 0.1 100 Grain & milling products 51.4 7.2 2.1 39.3 100 Combined feed 70.5 5.4 1.5 22.6 100 a. Including meat, poultry and animal oil. Source: Goskomstat USSR, Transport i Sviaz, Statisticheski Sbornik, Moscow, 1990, p 36. 65 Chapter 3 Exhibit 3.6 Rail Freight Traffic Trends in Europe, 1988 to 1992 (1988 tkm - 100) 110 - 100 - 90 - 70- 60 So 40- 30- 20 - 1988 1989 1990 1991 1992 (9 mos.) O DB Deutcbe BumdeMba (foe West emr Stae Railway) a DR Deutche Rekciibn (forer Eas Geman State Rway) )E CSD Cesb,lovenske Statii Drahy (frmwn Czewbaovalda State Railway) O PKP PolIsde KAeJe Panswowe (Polih State Railway) * MAV Magyar Allamvasutak (Hungaria State Railway) & FSU SZD cr oid MPS + SNCE Societe Nadmnae des cbee de fcr Francais (Preach Failway) v BDZ (tams) Bulgarian State Railway X CPR Caile Ferte Rmme Qbmanian Railway) 1992 mSU is actaly baed n Ruuia for firt 5 xmmh. 1992 BDZ hi esima1 for ere yeu. Source: Blackshaw and Thompson, Ralway Refonn in the Central and Eastern European Economics, Transport Policy Research Working Paper 1137, May 1993 66 Chapter 3 Effect of the Break-Up of the USSR. Because of locomotives. These disruptions to schedule are its highly integrated operations, few institutions costly, both to the railways involved and to the were more heavily affected by the break-up of the service needs of the shipper. USSR and the subsequent troubled relations 0 Inter-Railway Interchanges. An enormous among CIS states than was Russia's railway amount of what once was single-line traffic must system. The breakup has had a number of adverse now transit two or more systems, each with its effects on rail operations, as well as on inevitable delay and processing time. Exhibit 3.8 managerial areas such as rate setting, revenue shows the daily wagon load flows among states, divisions, and wagon management. Given so many and among the former regional railways. Although uncertainties over the future of the CIS and the only about 17 percent of Russia's traffic originates form of railway management structures, there are or terminates outside Russia, over 40 percent of no immediate prospects for resolution. Kazakhstan's originated traffic, and about half of * Traffic Levels and Patterns Disrupted. Belarus' originated traffic, terminates elsewhere. Existing traffic patterns, based on traditional About 60 percent of the traffic terminating in the sources of supply and consumption, have been Baltics, and 75 percent of the traffic terminating greatly disrupted. Much traffic that used to flow in Moldova actually originates in another state. as a result of the larger planned economy no The weakest points of all railway networks are longer flows, and traffic will never return to the always at the borders, and the CIS has created a patterns of the past. large number of interchange points where none * New Borders Delaying Transit Times. previously existed. Although trains are still scheduled centrally, * Freight Wagon Management. The division border formalities have increased and trains of rolling stock among republics has put an end to continue to be stopped to change crews and centralized wagon control and maintenance as well Exhibit 3.7 Common Carrier Rail Traffic (percentage, tkm) Frequency Distribution Cumulative Distribution Kilometers Midpoint China USA FSU China USA FSU 0-50 25 7.8 3.9 9.6 7.8 3.9 9.6 51-100 76 5.2 4.0 8.7 13.0 7.9 18.3 101-200 151 11.0 5.2 13.3 24.0 13.1 31.6 201-300 251 10.1 11.4 9.3 34.1 24.5 40.9 301-400 351 9.3 5.2 7.7 43.4 29.7 48.6 401-500 451 6.4 4.7 5.3 49.8 34.4 53.9 501-600 551 5.9 7.2 4.4 55.7 41.6 58.3 601-700 651 6.9 7.0 3.4 62.6 48.6 61.7 701-800 751 5.1 4.2 2.7 67.7 52.8 64.4 801-900 851 4.3 4.7 2.7 72.0 57.5 67.1 901-1,000 951 3.2 4.9 2.5 75.2 62.4 69.6 1,001-1,200 1,101 5.3 4.1 4.7 80.5 66.4 74.3 1,201-1,500 1,350 6.0 8.5 5.3 86.5 74.9 79.6 1,501-2,000 1,751 6.5 10.0 6.3 93.0 84.9 85.8 2,001-2,500 2,251 3.9 5.9 3.9 96.9 90.8 89.7 2,501-3,000 2,751 1.7 4.0 2.8 98.6 94.8 92.5 3,001-4,000 3,501 1.2 3.7 3.8 99.8 98.5 96.3 4,001 0.2 1.5 3.7 100.0 100.0 100.0 Source: China - Ministry of Railways as given to World Bank mission. USA - ICC wage bill data. FSU - Moscow Transport, 1990, p 100. 67 oa ~~~~~~~~~~~~~~~~~~~~~~~~~m a-, Azer- Central Georgia/ Kazakh Termination baijan Baltics Belarus Asia Armenia stan Moldova RUSSIA Ukraine Total outside CIS Percent Azerbaijan 1,131 15 27 34 320 24 3 477 122 2,153 1,022 47 ; Baltics 53 2,664 180 52 35 52 31 1,060 308 4,435 1,771 40 0 Belarus 57 496 3,429 131 74 III 162 1,434 947 6,841 3,412 50 c; Central Asia 19 53 66 4,411 21 386 18 860 146 5.980 1,569 26 Georgia/ 163 18 27 47 1,623 44 22 537 149 2,630 1,007 38 Armenia Kazakhgtan 70 69 57 1,136 89 8,586 28 4,950 247 15,232 6,646 44 a Moldova 15 40 33 17 14 36 615 415 206 1,391 776 56 RUSSIA 629 2,608 1,370 2,062 1,110 2,941 468 87,776 7,011 105,975 18,199 17 Ukraine 234 674 1,071 345 301 318 1,105 7,387 36,531 47,966 11,435 24 TOTAL 2,371 6,637 6,260 8,235 3,587 12,498 2,452 104,896 45,667 192,603 45,837 24 Origination 1,240 3,973 2,831 3,824 1,964 3,912 1,837 17,120 9,136 45,837 outside CIS Percent 52 60 45 46 55 31 75 16 20 24 Horizontal Axis: Wagon Loads To. Vertical Axis: Wagon Loads From. Source: World Bank estimates. Chapter 3 as to the former free flow of wagons throughout 0 To ensure that each state keeps an adequate the system. This breakdown will have a major wagon fleet. effect on asset utilization and maintenance costs. 0 To set interline charges for wagon use. The difficulties of coming to grips with this issue The Council is purely a coordinating body. It were demonstrated at the February 1993 meeting has no power to enforce its orders except through of the CIS Railway Transport Council in Almaty, the common self interest of its members. While where reportedly the most heated debate centered the Council will have a small permanent staff, the on charges for using freight cars and a system for Chairmanship rotates among the member railways settling those charges between railway yearly. The Council is in many ways similar to administrations. The railways at the council the railway coordinating councils in the United meeting could not even reach agreement on the States, Canada and Europe, such as the system for distributing expenses for development Association of American Railroads (AAR) and the of such a system.5 Union internationale des chemins de fer (UIC). As * Disruption in Equipment Supplies. Sources such, while it performs a vital function which its of equipment and spares critical for MPS, which members cannot do without, it can enforce only used to be available within the ruble zone, are what is unanimously agreed upon. Given the now only available for hard currencies. Freight rivalries, disruptions, and increasing financial diesel locomotives came primarily from Ukraine, pressures among the states and their railways, it is passenger coaches from the former GDR, electric difficult to see how the Council can prevent the suburban passenger coaches from Latvia, and further segmentation of rail operations. electric passenger locomotives from the former Czechoslovakia. Although declines in traffic FYnancial Perfornance and Investment Plans currently enable railways to cannibalize surplus equipment in the near term to cover shortages, the Declines in traffic levels and increasing costs have disruptions are highly threatening for the longer rapidly cut into MPS' once steady profits. Despite term. Out of necessity the situation is prompting its virtual monopoly on internal surface traffic, development of local sources of supply within MPS has been caught in an inflationary spiral well each republic. known to railways elsewhere: costs go up rapidly, * Creation of the CIS Railway Transport but government pressures, regulatory Council. To prevent the total disintegration of rail interventions, or market forces constrain price operations within the CIS, a CIS Railway increases. As a result, financial performance Transport Council was established early in 1992 deteriorates. On a consolidated FSU basis, rail to coordinate functions formerly performed freight services, which had always earned a steady mandatorily by the old MPS (exhibit 3.9). The profit of about 6 billion rubles (constant 1991 Council, which includes representatives from all prices) fell to zero in 1991 and are now losing member-states and from Baltic countries as money throughout FSU republics. observers, has several charges. * To determine amounts and procedures for Passenger earnings, which used to average about dividing revenues among regional and independent Rbl billion, collapsed in 1990, fell to a loss of republic railways for interline shipment revenue Rb2.6 billion in 1991, and are continuing to divisions. The Russian MPS actually continues to deteriorate steeply. The 1993 federal budget administer the revenue divisions for all railways, estimated MPS' 1992 passenger losses at Rb53 but Ukraine and Belarus intend to take over their billion. The financial problems are already leading own revenue management activities as soon as to the well-known railway practice of deferring possible. track and equipment maintenance, calling into * To coordinate rate and tariff setting for question the validity of the financial performance traffic among the independent states. of even the last few years, and creating a * To set common technical standards and deepening problem for the future. After years of monitor maintenance levels for the wagons used in stability and a comfortable existence, MPS has interchange traffic among CIS railways. reasons for concern as it looks at the future. 69 Chapter 3 Exhibit 3.9 The Directorate of the CIS Railway Transport Council |Chairman| Firs. Vice-Chairman Vice Chairman V.N. GINKO lD. NIKIFOROV Traffic Planning & Transport, Tariffs Rules & Regulations, Traffic Coordination & Claims Division Accounting. Locomotive/ Division Wagon/Container Utilization & Maintenance Division Railway Administrations of the CIS Russia Kava |Ukrainel ;m. B yelorussia Central AsianatcRiwy | |(Uzbekistan)l SOURCE: Rail InternationaL, August/Septecter 1992, p. 22~~~~~~~~l AzerbaijanKrgzi c Transcaucasian Railw Ry y is do by (Georgia)l Armenia IMoldavia Baltic Railways l atvia i Estonia ll Lithuani S0UJRCE: Rait InternationaL, August/Septerrber 1992, p. 22 Within Russia, regional railway net income for months, and net income was 73 percent lower (in 1992 in constant rubles is clearly far below constant 1991 rubles). Traffic for the October customary levels, and anecdotal evidence suggests Railway is down by 25 percent from 1990, and its that the picture they face is far worse than MPS' net income also fell sharply. (The October overall estimates. For example, the Moscow Railway is the oldest and, in terms of track km, Railway's 1992 freight traffic in the first nine largest of Russia's 19 regional railways.) By late months was 20 percent less than 1991's first nine 70 Chapter 3 1992, the annual railway operating deficit was an budget. An additional RblO0 billion was requested estimated Rb73 billion.6 to be made available at preferential rates to Aside from loss of traffic, the outstanding cause replenish current assets of enterprises in the of the fall in performance throughout the system industry. There has been a substantial decline in was the rapid increase in expenses compared with the production and delivery of railway equipment the lack of increases in rates. Notwithstanding the (exhibit 3.10). MPS requested capital investment increase in prices for fuel, rolling stock, spare budget totalling US$490 million for the purchase parts, rails, and sleepers, the cost of labor is of 30 reefer cars, some diesel locomotives, 600 proving to be an additional burden. On the basis passenger cars, and other equipment from of the 1992 Tariff Agreement between the Russian Germany; US$79 million for the purchase of the government, MPS, and the Central Committee electric locomotives from the Czech republic; and of the rail sector's trade union, transport workers' US$200 million for the purchase of a incomes came under a quarterly indexing scheme computerized passenger reservations and ticketing beginning April 1992. The fiscal impact of this system. Many of these funds will be made agreement will be felt in 1993, when wages are available through centralized bank credits. expected to be two and one half times those paid Allocation of raw materials and materials for in December 1992.' This development compounds export will generate US$250 million more foreign the effect of significant levels of redundant labor exchange for the production of two-story on the MPS payroll (besides non-transport passenger cars for suburban commuter services.8 employees), perhaps as much as 30 to 50 percent. According to MOF, however, the approved Equitable schemes must be developed and implemented if unnecessary employees are to be shifted to more productive Exhibit 3.10 Railway Equipment Production and Delivery Statistics activities. Wage indexing makes the task of improving Railway Equipment Production the railways' financial 1992 Percent position that much more 1991 (estimatc) Change difficult and restricts Mainline diesel locomotive sections 39 36 -8.0 management's options. Mainline electric locomotives 210 126 -40.0 The financial difficulties of Mainline freight wagons 22,400 14,000 -37.5 The raiways are becominges of Mainline passenger cars 1,013 540 -47.0 the railways are becoming so serious that increased assistance is being requested from the government. The Raiway Equipment Deiveries to SZD/CIS/Russrn Railways budget includes support to Percmt operations as well as outlays 1991 to for investments. MPS FY93 1985 1990 1991 1992 1992 budget request included Electric locomotives 580 316 255 130 -49 outlays to fulfill the terms of Maindine diesel locomotives 647 498 1 - Shunting diesel locomotives 493 367 437 290 -37 the wage Tariff Agreement as Freight wagons 65.453 52,468 37.661 16,537 well as an allocation of Passenger coaches 2,72) 2,592 2,262 2,111 -56 Czes(TEtI) 20,863 15,020 12,046 _ -7 Rb204.4 billion to cover losses incurred on passenger E - foo equvleet unit transport. A request was also made to have the Rb 140.4 Sources: Lukov. BE., 'World's Busiest Netwoik Breals Up,' Developing Ribvays 1993: A Rihvay Gz=eue Yearboa (GM Locomotive Group, 1993), p 21; T&NIITEI. Rahdays of dIc Russian Federadon in 1992, (Mosow: billion debt amassed by MPS TuNIITEI MPSM, I93), p 21. for the purchase of rolling stock imports may be forgiven and absorbed by the 71 Chapter 3 federal investment budget for 1993 includes only and a different approach to wagon ownership and RblO9 billion investment support to MPS. Of this, maintenance than now exists. Rb59 billion was allocated to rolling stock and Rb5O billion for construction. 7he acquisition and installation of a wagon- In addition to budgeted support for equipment tracking system for Russian railways should and rolling stock purchases, the MPS investment probably be considered a project for the longer plan includes major capital construction projects term (beyond three years) because of the technical aimed at network capacity expansion and further and institutional complexities involved in electrification of existing lines. Completion of the implementing it. An effective wagon-tracking AYaM spur linking Yakutia to BAM is being system requires negotiation of complex contemplated. Construction of an extremely costly conventions among Russia's 19 railroads high-speed rail link between St. Petersburg and concerning communications systems, information Moscow is also being studied. According to systems, and the financial, mechanical, and calculations developed by consultants, it would operational treatment of wagons. Where such cost roughly US$7.4 billion to build a new matters have been resolved in the West, their railway between Russia's two largest cities that resolution not infrequently took a decade or even would permit speeds of about 300 kilometers per longer and often involved expensive, wasteful trial hour and cover the 650 km (403 miles) distance in and error. It would be imprudent to expect that 2.5 hours.9 Consultants admit that the present the implementation of such a system should begin living standards in Russia are not adequate to in Russia before the basic institutionalframework enable the twelve million passengers who travel for cooperation among the railways in a market- annually between these two cities to support such based economy is in place. a venture. Assuming a capital cost of US$1.80 million per mile, an average trip distance of 403 Container Service. Russia will be slow to enjoy miles, a rate of return required by investors of 10 the benefits of containerization that have percent, and a 50 percent operating ratio (the revolutionized trade and reduced transport costs French initially reported achieving a 50 percent elsewhere. Domestic containers are moved in operating ratio for the TGV line between Paris general service freight trains, normally mixed with and Lyon) the one way ticket fare required to other traffic. MPS initiated a three level delivery break even would be US$123.00. It is unlikely service for containers in 1988. The first level was that Russian travelers could or would be willing to for a single wagon load, with minimum haul pay such a fare for years to come, nor would distance of 300 km, but no service commitment. many of them ever wish to so long as the cheaper, The second level was for multiple wagon loads, more conventional service were available. It is with minimum distance haul of 900 km and likely that the high speed rail service would face minimal service commitment. The third level was stiff competition from airlines as well.'0 for single wagon handling on the rear of passenger trains, with minimum distance haul of Operations 1,600 km. Performance is often poor and penalties are currently being paid. The republics jointly Wagon Control. Compared with North American own about 12,000 13.4m container wagons and and European practice where wagons and 20,000 18.5m wagons. All 20 and 40-foot ISO locomotives can be located and dispatched containers are moved on these flatwagons, whose continuously and in real time, Russian wagon and design speed is 120 km/hr, but whose maximum locomotive management is well behind. Creating authorized speed is 90 km/hr. The net/tare ratio of an up-to-date management system requires new these wagon is 2.4, compared to about 3.6 for computers and software which, while complex to new container flats in North America. The use of specify for use in the Russian environment, would articulated skeleton structure container flatwagons not be particularly difficult to implement. Such a has not been considered. Doublestack container system, however, is also likely to require several wagons cannot be used because of overhead generations of advanced communications facilities catenary power line clearance restriction. 72 Chapter 3 Domestic 3 and 5-ton containers are moved in sense the effects of the network's physical high-side gondolas." degradation. Every day, about 50 trains are delayed because of problems with the rolling Physical Infrastructure. There is considerable stock, and everyfourth diesel locomotive goes on evidence that the physical state of the MPS line in need of some sort of repair. Disrepair of infrastructure is deteriorating as financial and the track has an unusually deleterious effect; 21 operating problems increase. In a study done for percent of all defects and accidents registered on EBRD, consultants rated the need to address the entire network were attributed to the October deferred track maintenance as the most serious Railway. These problems are compounded by the problem facing MPS. 12 World Bank missions have attitude of the work force: operating discipline for noted the deterioration in track quality (exhibit train movements has deteriorated, with four times 3. 11). The number of kilometers of track subject the number of violations in 1992 as opposed to to slow orders - where the normal speed has been 1991. Absenteeism increased in 1992 by 12 reduced because of poor track conditions - has percent over 1991, and in some divisions of the increased since 1986, reflecting inadequate railway reached 30 percent. Intoxication on the replacement of rails and sleepers and inadequate job has also apparently been a significant problem, cleaning of ballast (exhibit 3.12). Decreasing but little administrative action has been taken to funds and the fall in purchasing power are causing curtail its incidence.'3 serious deferral of maintenance and investment. The rate of locomotive replacement fell between Environmental Problems. Serious environmental 1989 to 1990, and all evidence points to further concerns within the Russian railway system are declines in 1991 and early 1992 (exhibit 3.13). evident, including asbestos in ballast and fuel The average age of diesel locomotives has been spillages. On roughly 5,000 km of line, ballast increasing - a clear sign of an impending contains between 0.5 and 1 percent asbestos. problem. Studies indicate that this does not, in most cases, pose a serious health hazard, but the issue 7he record of the October Railway, the largest warrants independent examination and assessment. in terms of track-Ian, symbolizes in a very real Exhibit 3.11 Number of Track Kilometers Subject to Speed Restrictions 1 2 . 8 .c 2 0 1986 1987 1988 1989 1990 1991 1992 (Source: EBRD Study, p. 71) 73 Chapter 3 where train density is not high, it Exhibit 3.12 Track Material Deliveries is an increasing problem in more populated areas, and where passenger train density is high."4 1986 1987 1988 1989 1990 Obsolescent Technology. Russian railway equipment is Rails (million tons) 2.33 2.24 2.27 2.26 2.19 justifiably known for being Timber sleepers (millions) 20.20 18.30 16.30 14.70 12.50 robust: it works, under some of Concrete sleepers (millions) 9.40 9.60 10.10 10.10 8.60 the most severe conditions in the Ballast (million cubic meters) 20.90 21.10 21.60 20.60 19.50 world, although much of it is relatively inefficient to operate Source: EBRD Working Paper, Track and Structure, p 11. and expensive to maintain. Given the trying circumstances MPS will face in the coming years, improvements in railroad Because fuel has always been cheap, a problem technology could make a significant contribution that will presumably be corrected through price to reducing costs, providing better services, and reforms, careless spillage and overfilling has been dealing effectively with growing truck rampant at locomotive fuelling facilities. These competition. Moreover, much Russian railway facilities now have serious groundwater pollution equipment is obsolete. problems. A similar problem may also exist at * Russian diesel locomotives use about 30 locomotivemaintenancefacilitiesthroughdumping percent more fuel than their counterparts in the and spillage of lubricating and insulating oils. United States, even though the typical locomotive Another environmental problem is that Russian service cycle in Russia should permit maximum passenger trains do not have retention toilets. fuel efficiency." If locomotives were brought up Although this practice is acceptable in rural areas to world class levels, Russia could save up to I billion gallons in diesel fuel, or US$1 billion equivalent in annual savings, Exhibit 3.13 Locomotive Replacement and Maintenance at US$1 per gallon. 0 The MPS telecommunication system is inadequate even for normal 1989 1990 voice communication. Data Number of locomotives in existing stock transmission for a Russia or CIS-wide Electric (in operation per day, on average)' 14,478 14,491 wagon location and control system Diesel 11,577 11,500 like that used in the United States and Number of locomotives added to existing stock Europe does not exist. Electric 330 316 * MPS' management information Diesel 571 498 system (MIS) is not adequate for a Number of locomotives repaired railway operation in a market Electric 2,391 2,243 economy, even if the set of data Diesel 6,778 6,342 appropriate to such purposes is available and collected. The MIS a. Includes locomotives used in freight and passenger traffic, on currently employed by MPS is long runs and in local traffic. designed for public accountability and, most important in the FSU, for Source: Statistical Report on Operations of Railroad Transport for reporting progress against an annually 1990, MPS. approved centralized plan. Computer equipment available to MPS is several generations out of date by 74 Chapter 3 western standards, and lacks the capacity and activity in Russia and the CIS. If the natural speed necessary to handle important problems resistance to change can be confronted and such as real-time wagon tracking or system-wide overcome, technical and managerial improvement passenger reservations. Most important for the is possible. immediate future, existing MIS capabilities do not enable the railways to determine revenue and costs U.S. experience demonstrates that making the by line of business, consequently inhibiting railway more directly responsive to market needs assessment of real profitability for types of traffic brings dramatic change. The U.S. railways' or the value of cost-cutting operating proposals. restructuring, based partly on the creation of MPS is in no position to undertake the strategic Amtrak and reorganization and privatization of planning necessary to manage its transition to the Conrail, was accelerated by the thorough structure of rail system needed in a market-based deregulation of rail and track in 1982. U.S. economy. railway labor productivity, as well as locomotive and wagon productivity roughly paralleled that of 0 Equipment available for track maintenance, the FSU until about 1982. After 1982, U.S. rail especially cleaning track ballast, uses excessive productivity and cost management improved more track time, does not perform to modern standards, quickly than in the FSU (exhibit 3.14). U.S. and is not sufficiently mobile.'6 railway profits and investment are at their highest levels in history, even though average freight In sum, although quite well managed in an revenue per tkm has fallen in constant as well as operational sense, MPS is not well organized to current dollars every year since 1982. Similar respond to customers demands or market-delivery pressures and trends will be felt in Russia if competition. Moreover, MPS has been weakened appropriate competitive and regulatory regimes by changes in the level and structure of economic can be implemented. Exhibit 3.14 Comparision of U.S. vs FSU Railway Labor Productivity Levels Labor Productivity (min Traffic Units) 6 4 -I 3- 2- ov 40 45 50 55 60 65 70 75 80 85 90 year US (TUs/Employee) - FSU (TUs/Employee) Sources: US data: AAR, Railway Facts, 1990; Russian Data: MPS, Statistical Report on Railway Operations for 1990 75 Chapter 3 Organizational and Institutional Changes degree of operating autonomy, this system of regional profit centers has fostered a system of Organization for a Market Economy. MPS' behavioral incentives that cause regional railways organization was geared to carry out a centralized to act against the interests of the railway system as plan in a disciplined, quasi-military manner. The a whole. Examples of these questionable general quality of SZD's technical management incentives include: was entirely adequate to this task. On a technical * Locomotive Utilization. Since locomotives basis, MPS has earned the respect of railways are owned by regional depots, no locomotive can worldwide, but current organizational structure is travel farther than its depot boundary. The not suited to providing the flexible, efficient, and practice of changing locomotives reduces reliable service required in a market economy. locomotive utilization, adds unnecessary switching Because traffic was assigned to it, MPS needed no costs, and extends travel times. marketing organization and only limited concern * Traffic Handling. Revenues are divided with customer service to maximize its business. among regional railways on the basis of an MPS This will not suffice in a market economy. formula tied to relative work performed. By Each MPS enterprise has control over its local manipulating this formula, each railway can resources and is designated a profit center with its maximize its profitability at the expense of the own revenue and income statement. Each regional system as a whole. Regional railways try to railway (a) owns and controls its own influence the calculation of work on which the locomotives and (to a lesser extent) passenger revenue is divided. For example, to reduce coaches, (b) controls a major portion of its capital demurrage charges between railroads, each planning and spending, and (c) controls loading of railroad has an incentive to move trains across wagons while on its property. While MPS is boundaries before 6:00 pm, a practice that can charged with assigning traffic and developing undercut the orderly receipt and handling of the system-wide schedules, each railway controls its cargo. (The daily charge for wagon use is own operation and is less subject to control from assessed for all wagons on line at 6:00 pm each the center than is the case in most other railway day. This leads to the so called "18:00 Report.') networks. The solicitation and handling of individual types The system actually operates as a fragmented set of traffic is also distorted, because the revenues of individual, geographic fiefdoms, each focusing received are not necessarily related to the costs on its own interests and none fully aware or incurred from handling such traffic. concerned about the interests of the system. It is * Parochial Focus. Regional railways also fair to ask whether MPS actually represents inevitably focus on their own traffic, and have the interests of the national transport network the limited incentive to provide adequate service to regional railways, or its own interests as a control traffic which originates or terminates off line. bureaucracy. Despite the best efforts of central Because they cannot control the service provided planners and organizers, the MPS system actually by others, they may not profit at all from their does a rather questionable job of delivering efforts. For example, in the operation of the reliable and effective service to the customer. Sealand Landbridge trains across Russia from the MPS has only limited ability to control train Pacific to Poland or Hungary, it was difficult to operations within a given railway; to track get the regions to honor an MPS commitment to wagons, containers, or unit trains throughout the run trains from coast to coast as a non-stop unit. system; or to offer effective and reliable service to This problem can be ameliorated with a better higher paying customers. The fact that the entire incentive system. The North American railway system was centralized into a single monopoly has system has private carriers that compete for traffic also made MPS difficult to control politically. and simultaneously cooperate on traffic on a The designation of each regional railway in relatively successful basis. MPS as a profit center is a form of decentralized * Capital Expenditures. Each regional railway railway organization that has vanished from the shapes capital planning according to its own world's market-based railways. Besides an unusual interest, and not that of the system or shippers 76 Chapter 3 originating or terminating out of the region. the total construction cost of BAM will probably Although MPS tries hard to coordinate investment never be fully known, it was huge; one estimate plans, the system leads to poor asset utilization is US$30 billion. BAM was built on a crash and higher-than-necessary capital expenditures. priority to provide an alternate route for the Trans Moreover, as financial problems worsen, keeping Siberian railway to the Pacific coast. The Soviet each railway responsible for its own capital government believed that the existing route was expenditures could lead to the same reluctance to too close to China, and strategically vulnerable to operate a pooled wagon fleet as now being Chinese pressure. In practice, the BAM route is experienced among the republics. inferior, and has proven to be highly * Subsidizing Uneconomical Lines. The uneconomical. The construction and operation of suburban commuter rail business and some of the BAM seriously drains resources of the system as regional railways, especially the Baikal a whole, and reduces funds that should be Amurskaya (BAM), lose money, but are operated available for more important purposes elsewhere. for social or other reasons. In 1992 the federal In fact, the high cost of building BAM may be budget was amended to provide subsidies to cover one of the explanations for the fact that the rest of the operating losses of commuter services, but the railway has not been as well maintained as it generally it is expected that profits generated by should have been. the rail freight business will be diverted to Operation of BAM is so uneconomical that it keeping the suburban services operational. While has caused MPS' entire rate and tariff structure to Baikal Amerskaya Railway: Recent Developments Construction of BAM was largely an outcome of a past conflict with China. The line traverses the permafrost east of Lake Baikal to Vannino several hundred kilometers north of the Trans-Siberian line, which roughly traces the Sino-Russian border. Although the line is not complete, it is argued that further construction is justified to gain access to a wealth of Siberian natural resources. The AYaM (the north-south line which is to link Yakutsk to BAM) reached Aldan by the end of 1992 despite a number of hardships, including shortages in supplies of sleepers, labor flight, lack of funds and inability to pay for materials needed to complete construction, and even an inability to pay and adequately feed the workforce for several months at a time. Despite these accomplishments, the Amur-Yakutsk line still has some 530 km to go before it reaches Yakutsk. According to the 4 January 1992 Government Decree N520 "On Measures to Complete the Construction of the Baykal- Amur Railroad Mainline (BAM) and the Construction of the Berakit-Tommot-Yakutsk Railroad Line," goals for 1995 include completion of the Severomuyskiy Tunnel (1324 meters remain to be tunneled out of the total 15,343 meter length; 480 meters were tunnelled in 1992), 187 km of secondary main track, plants for the production of ballast and the treatment of wooden sleepers, locomotive depots, warehouses and cargo storage facilities, housing, schools, hospitals, and clubs. The price for all this amounts to Rb2.3 billion in 1991 prices, which requires an annual commitment of 700 million 1991 rubles. For 1993, however, only Rb300 million appears to be available from the State Budget. Meanwhile, a commission is to be dispatched to BAM to decide just exactly what is to be completed and what is to be left unfinished, and a ministry is to be created for the AYaM within the Council of Minsters to act as a contractor and oversee all matters pertaining to the use of the railway. Completion of the AYaM is thus in question, but most relevant to plans for developing natural resources in Yakutia1Sakha. For example, an international tender has been announced to develop the Udokan copper deposit, which could only succeed with railway access. In view of Government's financial difficulties, efforts should be made to explore ways in which such developments could contribute to railway construction costs. Sources: 'Amur-Yakutsk Railroad to be Completed by 1998", Interfar Business Report No. 48 (451), 10 March 1993, p 3. 'Russian Government Financing Construction of Railroad in Yakutia', Interfax Business Report No. 39 (442), 25 February 1993, p 4. 77 Chapter 3 be distorted. About 8 percent of each railway's ancillary activities such as clinics, schools, revenues is said to support BAM. As financial manufacturing and so forth. World Bank analysis resources worsen, regional railways will shows railway labor productivity to be less than increasingly resist the requirement to cross- half that of U.S. railways, the most comparable in subsidize MPS' losing operations. In the future, size and traffic levels to the Russian system. BAM should be set up as an independent carrier, While it would probably be uneconomical for receiving support from whichever level of Russia to attain equivalent productivity, it should government - defense or otherwise - believes be possible for MPS to operate its freight service BAM's services justify their cost. with at least 20 percent, - roughly 200,000 - Unbalanced centralization at MPS, combined fewer employees. Since transport employment with poorly designed decentralization of regional levels fell by more than 10 percent from 1990 to railways, has led to a rail system that is a huge 1992, this may not prove so difficult. monopoly, difficult to control politically and yet generally unresponsive to shipper quality and The government should also assist MPS in service needs. The railway system operates as a transferring ancillary activities such as schools, fragmented set of individual, geographic fiefdoms, clinics and other welfare related activities, to other each focusing on its own interests, and not on the appropriate agencies, or sell them off. The broader interests of rail system as a whole. magnitude and complexity of this transformation While analysis is not yet available to suggest should not be underestimated; it will require time exactly what form a new railway organization and effort, as well as corresponding reforms in the should be, it is clear that if there is to be any social security system and a clear delineation of effective competition forfreight transport services responsibilities and expenditures among different in Russia in the near-term, it will have to be levels of government. In the near term, the social provided by intra-rail competition. The highway functions of the railways should at least be network is too limited, distances too vast and the separated from their core activities and treated as process of creating both highway capacity and separate account entities. Ancillary activities that healthy private sector bus, trucking and barge are commercially oriented could be separated from competition will take far too long to provide the railways and privatized. immediate assistance except in very limited cases. For many years into the future, most long haul Future for the Railways surface freight transport will have to be carried by rail, and the only way to get competition will be Traffic Levels Unlikely to Return to Prior Levels. through intra-rail enterprise. Without such Future railway demand is going to differ radically competition, MPS will face essentially no pressure from past demand, both in its eventual level and to serve transport needs effectively, and there will in its composition. Much short haul traffic will be no effective way of forcing it to do so. shift to truck. A significant part of the excessive Even if operation and control of rail lines were haulage of basic commodities will cease. restructured so that competition among railways Enormous amounts of traffic will still remain, but could occur, however, continued direct routings and service needs will be quite different government management would likely prevent the from those of today. As a result, the current MPS achievement of ideal levels of competition. capital plans are almost certainly wrong, putting Nonetheless, restructuring to achieve competition, money into the wrong assets - network expansion even if coupled with continued government and electrification rather than track maintenance involvement for some indefinite period, would and communications - and in the wrong places - represent a significant improvement over the BAM rather than maintaining the Moscow/Minsk current system of regional monopolies. main line. A clearer view of the future would not necessarily reduce investment and maintenance, Overstaffing and Improved Productivity. The but would certainly redeploy what is available into railway system employs some of 2.22 million critical assets that will remain no matter what the people, 1.64 million in transport, the remainder in railways' future role. 78 Chapter 3 Projections made by EBRD consultants show MPS forecasts an earlier and steeper positive rail freight demand will not return to 1990 levels upturn for freight, even though its projection for before the year 2007 under the most optimistic 1992 shows a deeper drop from freight levels than scenarios, and not before 2015 under the most that expected by EBRD consultants - which may pessimistic scenarios. Similarly, passenger levels itself be too optimistic on energy traffic - a were not projected to return to 1990 levels until at development which would call for even more least the year 2000. These scenarios assume an pessimism than is in this forecast. The MPS economic turnaround by 1993-94 at the earliest or estimates for passenger transport are also more by 1995-97 at the latest. Given the recent optimistic, showing a higher forecast for 1992 and difficulties confronting the Russian government, a much flatter estimate of the response of this could mean that even the "low" scenario is passenger demand to the forces of economic optimistic."' 1992 performance data, however, change. MPS's optimism may be attributable to its indicate that passenger traffic has not fallen off to decision not to raise fares as costs increase to the the extent that freight traffic has. Available data same extent assumed by EBRD consultants. There indicates that the freight task performed in 1992 is would be less falloff in demand than expected by 22 percent less than the 1990 rail freight task, but EBRD consultants if cost recovery is not that the passenger task was down by only 7 maintained at current levels. The relative percent. While rail passenger traffic has declined unprofitability of passenger services, especially significantly in Moscow and St. Petersburg, suburban services, means that continued high several regions saw an increase in the passenger passenger demand levels will actually further task in 1992 over 1990, including the South-East, weaken MPS financially. Sverdlovsk, and Southern Urals Regional In broad terms, the shift to a market economy in Railways."8 Major increases in airline passenger Russia is expected to have a significant negative tariffs have served to drive passengers from air to impact on the relative amount and composition of rail, thus maintaining demand for rail transport. rail traffic. The expected decline in the rail freight A Fragmented System: The Case of SeaLand The market for-trade between Asia and Western Europe is enormous and growing. As a major operator of sea and land containers, the Sealand Company conceived the idea of forming a joint venture with MPS to provide landbnrdge services using MPS as the connecting carrier between the Pacific port of Vostochniy and the Polish and Hungarian borders. While simple in concept, implementation posed enormous problems. The primary requirement for container services is fast and highly reliable service. Physical performance estimates indicated that a transit time for containers of around 14 days would be achievable, and would permit a profitable rate in competition with sea transport, which can offer about 26 days to European ports. Sealand developed an agreement with MPS for MPS to provide rehabilitated wagons dedicated to landbridge service as its contribution to the joint venture and to agree to move the containers in unit train service from the eastern coast to the European border within 14 days or less. In initial operation, actual transit times initially averaged about twice expected. This was because the wunit' train was not given priority handling by the regional railways and because the regional railways, while keeping the container wagons together as a block, tended to add and remove wagons at regional railway boundaries. More recently, slow throughput of containers at the port of Vostochniy has been greatly affecting total transit times. Inadequate communication between modes has also resulted in scheduling delays. Consequently, lucrative arrangements have been negotiated with rail service providers near port and border crossing areas, and rail transit times are now working at 14 days or less rather consistently. 79 Chapter 3 share is attributable both to the general economic competitive transport systems has shown that MPS conditions and to long-term changes in the and the regional railways as currently constituted amounts and types of traffic carried. This is the simply will not function adequately in a market clear lesson of Western economies, and is the context because they will not have the proper strongly emerging trend in the restructuring CEE incentives to respond to either customer or economies. Spatial industry distribution will be government pressure. The consequences of this rationalized in accordance with economic malfunctioning could be severe, resulting in (a) principles. Major regions of the old FSU coal poor transport service with its attendant economic industry will be uneconomical once market prices cost; (b) predatory pricing behavior on the part of are applied for inputs, especially energy and the railway as it attempts to defend its shrinking labor, and producing areas, especially in Ukraine, market position; and (c) huge, unsustainable will be shut down. More oil and petroleum deficits that pose a serious macroeconomic products are likely to be transported by pipeline, challenge for the overall economy, as was the case as the industry becomes more profit-oriented and in the United States and Japan, and is currently as greater technological investments are made. the case in nearly all western European Currently, about 33 percent of petroleum tonnage economies. travels by rail whereas the comparable figure for the U.S. is only 3 percent.'9 This difference may Future of Suburban Services. MPS suburban be the result of site-specific factors and to passenger rail services are quite large by world restrictions from the Cold War placed on FSU standards; only Tokyo and Osaka are larger. access to the most modern oil pipeline technology. These services play a critical role in urban If the latest technology is eventually made transport, particularly in Moscow and St. available, as it should be, a significant part of Petersburg, and probably in other cities as well. today's oil traffic will shift from rail to pipelines. Although these services are the most vulnerable to Finally, recent World Bank reports have suggested a shift to bus and automobile, they will be that Russian agriculture, if restructured along the important for the foreseeable future. Suburban lines of market-based agriculture systems, would services are most responsible for the downward greatly shift the location and amounts of grain trend in MPS profitability, because costs have production, and of resulting grain transport.' risen rapidly while fares have been held down. Other forces will eventually have even more 7hese losses cannot be sustained. Measures to impact on rail demand than these shifts. The improve cost recovery and cost effectiveness need growth of competition from an increasingly to be taken. Losses will overwhelm the railway if efficient private trucking sector, combined with there are no more freight profits with which to increased shipper choice based on the quality as subsidize passenger losses. well as quantity of service, will further erode rail transport. This has been the universal trend in Future of Long Haul, Intercity Passenger market economies and, because of the increasingly Services. The future of long-haul intercity integrated nature of world markets, it is a trend passenger services is also likely to shift as which no country wishing to compete successfully automobile traffic increases. Currently, 46 percent in those world markets can safely ignore. of intercity passenger traffic is carried by rail The transition to a market economy will lead to compared to one percent in the United States. The drastic changes in the role of the railway, and will type of service offered may also change. require changes in policy, organization, and labor Presently, a major portion of long haul services force which would daunt any western government are on sleeper trains that typically depart in the or enterprise. A total change in management evening and arrive in the morning in European culture will be needed if the railway is to avoid Russian and sometimes several days later on long the financial difficulties experienced by almost all trips to Siberia. There are, for example, at least western railways as they have made the transition five trains of about 18 coaches each leaving to lightly regulated, market-driven operations. Moscow for St. Petersburg between 22:00 and Repeated experience in market economies with 01:00 nightly. All appear to be heavily utilized by 80 Chapter 3 western standards. Many of these trains could analyze and project profitability by line of more economically be operated as day trains economic activity. In the passenger sector, aside without sleeping accommodations, a change from suburban services, it is common that rural consistent with Western European and CEE short hauls are unprofitable. In the rail freight practice, and one which needs analysis. sector, the operation of BAM - which is unlikely by any analysis ever to be profitable - should be Near-term Recommendations removed from the operations of the railway system at large and supported by whatever part of Preserve key parts of the existing rail network that government believes it is needed. are jeopardized by inadequate maintenance and the disruption in the supply of spare parts and Take inmnediate measures to curtail suburban equipment because of the breakup of the FSU and passenger losses. Based on analyses conducted to by the railway's increasing financial difficulties. date, the biggest losses are attributable to railroad The government clearly recognizes the enormous suburban passenger services. The size of the importance of the railway system to the economy existing subsidy should be determined, since and therefore should support all efforts to preserve losses from performing social services should not those essential rail facilities and services that will be charged against or supported by freight and not immediately be rendered obsolete by the intercity passenger traffic. As soon as possible, coming structural changes in the economy. suburban fares should be raised to a level that Priority should be given to those parts of the rail stems the loss of railway resources. Since the network which are likely to handle large traffic largest suburban services are in Moscow and St. volumes in the future. Petersburg, they are the obvious places to begin this analysis. When the nature and amount of Network flow analyses could be used to identify these losses have been identified, it will be key portions of the network and assess the possible to move toward devolving the financial implications of alternative maintenance plans. In responsibility to municipalities. particular this effort would include (a) purchasing western made track maintenance equipment, (b) Allowfreight rates to rise to cover costs. To the using it on main lines that are critically under- maximum extent feasible, railway operations must maintained, (c) purchasing additional passenger be placed on a commercially self-sustaining basis. equipment for use in suburban areas and (d) Rail freight rates on all commodities must cover assessing on a priority basis potential at least the costs of providing them. environmental problems. Revise investment priorities to meet urgent needs Take steps to limit operating losses and by (a) deferring or eliminating projects with low strengthen financial performance of the railways, rates of return, and (b) ensuring that projects to reduce the railway sector'sfiscal impact on the related to improving rail operations under a National the government's budget. Analytical tools command economy will have a commercial should be developed or acquired as soon as application in a market-based economy. These practicable to aid in reducing or eliminating criteria for railways investments would defer or subsidies to particular types of railway services. eliminate further projects to build new or electrify The government should make direct payments for existing rail lines, with the possible exception of any non-remunerative passenger service it feels is gaps in the Trans Siberian line, and would necessary. The government should also have an minimize further investment in BAM. There explicit agreement with railway management, should also be no further investments in new covering goals for improving cost recovery, industrial lines, such as those supporting natural lowering costs of operation, and agreeing on any resources exploration in Siberia, unless the government support that may be required. To do required resources are provided in the context of so, railways need to improve their cost accounting the development projects and do not burden the and network traffic flow models to enable them to railway's scarce resources. 81 Chapter 3 Heightening awareness of the changing nature structure of the railway, a labor redundancy of transport demand and the consequent need to program should be designed to provide transitional develop long-range views of the railway's role in assistance to employees declared redundant or a market-driven economy. Perhaps no precondition wishing to retire. Railways around the world have for effective government management of transport been striving to reduce employment in recent sector restructuring is less exciting but more years in an effort to reduce subsidies and become important than raising the awareness of more competitive. Many of them have introduced government officials to the wholesale changes that labor buy out programs to induce voluntary the transition to a market economy will bring. retirements. Polish railways recently offered staff This is especially true for railways. MOT and a year's salary to retire; plans in other railways MPS should be required to provide complete and offered up to 2.5 years' salary. insightful analyses of the financial and operating performance of the railways at industry levels, by Review the structure and function of intercity company, and by level of service. High-level rail passenger services to determine if they should policy discussions at the deputy prime minister be maintained as part of an integrated rail and cabinet minister level are essential to building enterprise or established as a separate operating this understanding and commitment. The key to and financial entity. The need for eventual supporting this analytical effort is a network competitive intercity passenger service is less traffic flow model for rapid analysis of the clear, but should emerge from the analysis profitability of current traffic flows, the impact on proposed. Experience in other countries strongly the railway of changes in future traffic flows, and shows that intercity passenger service should be evaluation of alternative organizational structures. operated as a separate line of business within the railway. Such service should probably be removed Medium-term Recommendations to one or more separate institutions that operate largely over lines primarily operated and managed Commence the process of adapting the structure of for freight services. the railway to the needs of the emerging transport markets in Russia. The government should Improve the quality of maintenance equipment. sponsor and implement an effort to develop and Existing MPS track maintenance equipment is evaluate restructuring alternatives for the railway highly inefficient, requires too much track time, system as a whole. This can be achieved by and does not produce high quality results. building on the capabilities and experience Equipment is available in the West that will garnered in analyses that isolate the financial greatly improve track quality and reduce performance of lines of business in order to maintenance costs. This equipment should be quantify and reduce subsidies, using the network acquired by purchase in the near term and flow model. The objective should be to introduce produced under license in the longer term. a new structure that offers freight customers competitive rail service if possible since effective Lay groundwork for developing a competitive, rail-truck competition will be limited to a private sector industry for repowering and relatively small part of freight hauled. This overhauling diesel locomotives. The Russian competitive structure is essential to provide market offers a unique opportunity to launch a incentives for efficient and responsive operation, new, privately managed venture for locomotive and to protect railways customers from monopoly rehabilitation and re-engining. Existing diesel power. For customers not served by competing locomotives are inefficient fuel users, are not service, regulatory protection will be needed. being properly maintained, and are growing old rapidly. Rehabilitation and re-engining would have Establish a labor redundancy program to a high rate of return on the investment. The need ameliorate the effects of anticipated for efficient and reliable diesel locomotives is unemployment. To cope with the anticipated certain to increase in the mid-term, and there increase in layoffs associated with adapting the would be ample demand for this type of work. 82 Chapter 3 Ancillary activities should be privatized and when to expect delivery. A plan is needed to separated operationally and financially. As in all ensure that an effective customer service-oriented socialist countries, MPS has a number of system is designed, procured, installed, and manufacturing and design activities, ancillary to operated in as cost-efficient a manner as possible. its rail function but which were provided by the Of equal importance is the establishment of a railway in the past. These include the manufacture similarly-oriented administration, funded perhaps of signal equipment and running many of the by user fees from railways, shippers, and research institutes. Such ancillary activities should customers, domestic and foreign, to operate and now be separated from MPS, managed separately, ensure the smooth functioning of what can be and eventually established separately or privatized expected to be a complex and expensive system. as soon as developments in the economy permit. As elsewhere in the economy, most of the MPS' Assess and address environmental problems. social activities, such as elementary schools, Environmental concerns include asbestos in should be transferred to the social sector for ballast, groundwaterpollution at fuelling facilities, operation. and human waste disposal. Devolve the operating and financial Long-term Recommendations responsibility for suburban rail commuter services to municipalities. Aside from posing a large Introduce a modern wagon tracking system. financial burden at the national level, commuter Because of poor communications and computer services are not properly operated by a national capabilities, MPS does not an have adequate railway because local authorities have a much system for tracking and dispatching wagons in real better idea of local needs and demands, including time. This leads both to poor utilization of a willingness to pay. Funding responsibility for critical capital resource and to poor service to these services should be transferred to the customers who need to know where their shipment appropriate local authorities as soon as possible, is at all times. Wagon tracking systems have as was the case with the metros. Shortly become a critical management tool for all western thereafter, managerial responsibility should also railways, and have made a major contribution to be shifted to the municipalities, although they may improved capital productivity. Given that the wish to contract with the railway to manage the Russian rail system will be short of capital services for the account of local authorities. resources for the near future and that new rolling stock will be more expensive and specialized for Devise a plan and an administration for the shipper needs, a better system for wagon and smooth introduction and operation of a modern locomotive location and management will wagon and container tracking system. The eventually be imperative. The wagon tracking division in principle of the former SZD rolling system will also be important to the management stock fleet was to have been effected by 18 March of wagons interchanged among CIS states. 1993.21 A new numbering system for 963,000 Without such a system to ensure efficient wagons railcars of the Russian fleet has been devised,' use and prompt return, political tensions are likely and plans have been drawn up to establish 109 to make interchange of wagons difficult and inter- border crossing points - 24 of which have been CIS freight flows more problematic. equipped - at which wagons will be tracked by a computer-based system linked to the MPS main Upgrade telecommunications. Modern railway computer center in Moscow.' There is little management is impossible without good indication that this system created to monitor communications. Wagon and locomotive location border crossings and determine wagon ownership and dispatching systems depend totally on is designed or capable of being used for more information transfer. Advance blocking and train commercially-oriented functions such as planning are also impossible without real time improving wagon utilization and tracking the knowledge of train consist and location. Passenger progress of wagons in transit so customers know reservation and freight billing information require 83 Chapter 3 voluminous and rapid information management. It competition among them. For example, it would is difficult to find railways in operation today in be possible: (a) to structure parallel line which the gap between the quality and volume of competition from Lake Baikal to Moscow and the basic communications and the overall need exceed western borders; (b) to make the Eastern Siberia, Russia's. While it will take considerable time and TransBaikal and Far East railways into bridge money to plan and install a modern carriers jointly owned by competing carriers west communications system, this is prerequisite to of Lake Baikal, ultimately yielding intrarail better management. competition over the entire route from Europe to Asia; and (c) to grant the Moscow railway Contract routine maintenance activities. In trackage rights over the October Railway to St. market economies, railways are increasingly Petersburg and the Finnish border. finding that outside contractors can perform a number of types of maintenance, including that of Notes rolling stock and track more efficiently than can the railway itself. Outside contracting is also an 1. Translation of N. Davydov "The Effect of excellent way to promote private sector Coordination: Results of the Sixth Session of the development because it will be relatively easy to Rail Transport Council of the Commonwealth find foreign partners to help with capital Member States in Kishinev," Gudok, 2 December requirements. The railway and the Russian the 1992, pp 1-2 in Central Eurasia, FBIS-USR-92- government should prioritize the evaluation and 163, 23 December 1992, pp 4-6. The Railway eventual development of contracted maintenance Transport Council has been caught up with the activity. rolling stock fleet distribution and has not yet had an opportunity to address the Belarusian proposal Implement changes needed to create intra-rail for direct settlement of accounts with shippers. freight competition, where appropriate, and to Inter-line account settlement is a sensitive issue regulate railway market power where competition both for the individual railway companies of the is not sufficient to govern prices and service newly independent republics in their dealings with levels. The railway today carries about 96 percent MPS and for Russia's own regional railways in of the surface freight in Russia, compared to their dealings with Moscow. By the end of about half in the United States and 30 percent in September 1992, the railways of Latvia and western Europe. Although this share will Lithuania had adopted a system of inter-line ultimately shift toward trucking, there is no exchange accounting which required payment in possibility of rapid transition because of the time advance for the portion of transit over their needed to expand the highways' and trucking respective lines. capacity. Furthermore, because of Russia's continental size, the railway share will always be 2. Translation of "What Should the New Ministry relatively large. Thus, the only foreseeable way to of Railways Be?", Eleltricheskaya i Teplovoznaya create transport competition is to promote rail-vs- 7yaga, January 1992 (No. 1), pp 2-3 in Central rail competition. The government should begin Eurasia, FBIS-USR-92-085, 8 July 1992. now to implement and use the network flow models recommended above to assess ways in 3. Transport i Sviaz: Statisticheski Sbornik, which intrarail competition could be created. (Goskomstat USSR: Moscow, 1990), p 36. Although intrarail competition has not been 4. Soviet Food Supply and Distribution, Vol 1, common in Europe, it is the norm in North Table 1, pp 12, 56. America, which has the world's most efficient freight railway system. There is no single or 5. T. Shirshova and N. Davydov, "On the Track simple approach to creating intrarail competition. of Integration and Unity," Gudok, 25 February It could be accomplished by combining and then 1993, p 2, titled "Railway Transport Council redividing the regional railways so there is direct Activities Profiled: Alma-Ata Meeting 84 Chapter 3 Highlighted" in Central Eurasia (FBIS-USR-93- in Central Eurasia (FBIS-USR-92-167), 31 031), 13 March 1993, pp 11-13. December 1992, p 51. 6. Gudok, November 26, 1992, from a translation 14. World Bank interview with MPS experts. in FBIS, December 31, 1992, p 50. 15. World Bank calculation. 7. Translation of V. Chistov, A Guarantee of Social Stability: From the Meeting of the Ministry 16. For a discussion of track maintenance issues, of Railways' Collegium. Gudok, 28 November see a translation of V. Gitkovich, "The Times 1992, p 2 in Central Eurasia, FBIS-USR-93-002, Demand a Search for Reserves," Gudok, 18 June 6 January 1993. 1992, pp 1-2, titled "Rail Collegium on Line Maintenance Issues" in Central Eurasia, FBIS- 8. "Russia Earmarks 204.4 Bn Rubles for USR-92-087, 11 July 1992. Railroads in 1993," Interfax Business Report, N" 29 (432), 11 February 1993, p 3. 17. Booz-Allen & Hamilton/Travers Morgan, Railway Sector Survey of the Independent States of 9. Yuriy Kovalenko, "French Propose Travel Russia, Belarus, Ukraine and Kazakhstan, From Moscow to St. Petersburg in 2.5 Hours," December 1992, pp 17-25. Izvestiya (6 February 1993), p 15, translated under "French Propose High-Speed Rail Link 18. MPS Central Scientific-Research Institute of Between Moscow, St. Petersburg," Central Information and Technical-Economic Research of Eurasia (FBIS-USR-93-020), 25 February 1993, Railway Transport, Railways of the Russian pp 110-111; Viktor Belkin and Vyacheslav Federation (Moscow: TsNIITEI, 1993), and MPS, Storozhenko, "High Speed Can Solve the Rest Statistical Report on the Operation of Railway Problem For Millions of People," Izvestiya (26 Transport in 1990 (Moscow: MPS, 1991). February 1993), p 4, translated under "Proposed Moscow-Petersburg Rail Improvements Could Aid 19. Transportation in America, 1992, 10th Edition Tourism," Central Eurasia (FBIS-USR-93-027), (Waldorf MD, USA: Eno Transportation 10 March 1993, pp 32-33. Foundation, Inc, 1992), p 59. 10. For any system, the amount of money that 20. Review of Food Policy Options and must be earned annually to pay back suppliers of Agricultural Sector Reforns, The World Bank, capital used to construct the system equals: (the March, 1992. per mile capital costs) x (the length of the system) x (the rate of return required by suppliers of 21. See translation of A. Loginov, "The Railcar capital). The annual income available for this Acquires an Owner," Gudok, 13 February 1993, purpose equals: (the average trip length per pp 1-2, titled "Dividing the Railcar Fleet, passenger) x (the per mile fare) x (1-the operating Determining Ownership" in Central Eurasia, ratio) x (the number of passengers). FBIS-USR-93-029, 12 March 1993, pp 47-49. 11. Booz * Allen & Hamilton/Travers Morgan, 22. See translation of unattributed article in Railway Sector Survey of the Independent States of Kommersant-DAILY, 18 February 1993, p 10, in Russia, Belarus, Ukraine and Kazakhstan, Central Eurasia, FBIS-USR-93-029, 12 March December 1992, pp 47-8. 1993, p 46. 12. Ibid., pp 139-40. 23. See interview with Granit Savvich Ivannikov, chief of the MPS Main Computer Center by 1. 13. Igor Cherevko, "Discipline is Not for the Kokoulin, "How Do You Divide Up a 'Pie"' in Poor," Nevskoye Vremya, 28 November 1992, p Gudok, 27 January 1993, p 2, in Central Eurasia, 2, titled "October Railroad Safety Record Scored" FBIS-USR-93-026, 6 March 1993, pp 46-47. 85 4 Road Transport Organization of the Road Transport Industry Russian part of Soyuzavtotrans consisted of 78 subsidiary organizations which in turn controlled There are about 3.2 million trucks engaged in 2,500 separate enterprises and employed 1.3 commercial road transport activities in Russia. By million people.2 In 1991, Russian for-hire trucking comparison, there are 15.2 million commercial transported 2.731 billion tons of freight, about trucks registered in the United States, of which 18.6 percent of all tonnage moved by truck in 13.6 million are single-unit trucks and 1.6 million Russia. All of these organizations reported to the are combination units.' Before the breakup of the Ministry of Road Transportation. This Ministry, Soviet Union, virtually all of these trucks were like those in the other Republics, was vertically assigned to a few giant, vertically integrated integrated and operated all commercial road organizations operating on a republic-wide level as transport, including taxis, as well as related monopolies within each Republic. Broadly services such as vehicle fueling, repair stations, speaking these included freight and passenger other motorist services, and equipment organizations to supply road transport services to manufacture for vehicle maintenance and cargo (a) the commercial sector on a for-hire basis handling. Rosavtotrans was formerly an throughout Russia, (b) state and collective farms, operational part of the Ministry of Road (c) the commercial sector for distribution within Transportation and provided most general purpose Moscow, (d) the commercial sector for trucking throughout Russia, with the exception of distribution within St. Petersburg, (e) the Moscow and St. Petersburg. While its operations commercial sector engaged in international trade, are in the process of being privatized, the and (f) producer and consumer cooperatives that Ministry still uses the name to refer to a large own their own retail stores. sector of general purpose trucking it used to control. Own-Account Trucking. By far the greatest Rosavtotrans's subsidiaries operate about amount of road transport is carried out by own- 260,000 trucks and carry more than 500 types of account trucking fleets, owned by individual cargo, of which 70 percent by weight is for the industries or enterprises which transported 11.957 construction industry. Rosavtotrans also operates billion tons of freight in 1991. This amounted to bus passenger services. More than 80 percent of 81.4 percent of freight moved by automotive the work is carried out on an annual contract basis transport for the year. and about 250 of Rosavtotrans's enterprises operate on a leasing basis. Many of the enterprises For-Hire Trucking. For-hire trucking is overseen are "mixed," operating both freight and passenger by Rosavtotrans, the Russian successor to what services and using revenues of the former to was called Soyuzavtotrans under the FSU. The cross-subsidize the latter. Only about 200 87 Chapter 4 enterprises and 25,000 vehicles are involved in introduction of new technologies, (g) marketing, hauling food on a full-time basis. Long distance (h) insurance, and (i) the manufacture of spare haulage of perishable food products is particularly parts. It is important that these be put on a small, around 1 million tons per year, and competitive basis to ensure their availability to undertaken with 2,500 mostly refrigerated semi- new entrants. The charter specifies other functions trailers with cargo capacities of 10-12 tons. that are appropriate to the role of a trade association, functions that do not involve the Auto Transport Associations. Rosavtotrans's exercise of any monopoly powers over the ability constituent organizations are essentially organized to do business of its members. These functions at the oblast level. The overall oblast-level include (a) the provision of public information, (b) organization is referred to as a trucking advertising on behalf of the association's association which, in turn, controls on average the membership, (c) safety, and (d) government operations of 35 to 40 trucking enterprises relations. Further changes in the functions of the operating within each oblast. Again, many of trucking associations are clearly necessary. these enterprises are mixed enterprises structured to cross-subsidize passenger operations from ASMAP. The international road transport freight revenues. A typical enterprise owns about association (ASMAP), now has 184 members 200 trucks, employs about 1000 people, and operating more than 10,000 trucks in international enjoys a commodity-specific or geographic commerce. Many of the firms are now monopoly within the oblast. Usually there is at subsidiaries of Rosavtotrans. International truck least one enterprise that distributes fuel and one transport hauls were, until recently, the monopoly that is responsible for repairs and the distribution of Sovtransavto, which was the international of spare parts within each association. Though trucking company monopoly of the Russian there has been a substantial change in the role of Federation. Since all imports transported by truck the associations since the break-up of the Soviet to the FSU had to be carried by Soviet carriers Union, they still play an important part in and shipment conditions had to be "free Soviet preserving within the for-hire trucking industry border," Sovtransavto was among the few Soviet many of the same characteristics as before. enterprises to earn hard currency and, thus, Developments in the Kursk oblast provide good invested in a modern fleet of western-made examples of the changes that are taking place and tractors (such as Mercedes, Volvo, Iveco) and those still needed. Before 1992, the automobile semi-trailers. Whereas the old monopolistic transport association for the Kursk oblast companies such as Sovtransavto are better essentially developed and directed the plans of equipped with modern West European trucks, operations for the automobile transport enterprises newly founded companies registered with ASMAP in the oblast. Within the last year, the charter of have limited access to hard currency loans or the association has been changed so that it is now leasing arrangements and will have difficulty an "enterprise trucking commercial firm" as entering international haulage without similar opposed to a "regional production association." equipment. With this change, the association has adopted new basic objectives that no longer place it in a Rosagroprom. The largest of the trucking supervisory role over individual trucking organizations in terms of vehicles, Rosagroprom, enterprises in the oblast. At the same time, the consists of trucking entities that were part of association still performs a variety of support and Agroprom, and was created in 1985 as an facilitative services on a monopoly basis for the amalgamation of several ministries and charged trucking industry in the oblast. These include (a) with various agribusiness responsibilities. the provision of spare parts and consumables Agroprom was subsequently divided among the including fuel, (b) transportation brokerage republics and operated as a monopoly in each. services, (c) freight forwarding, (d) consignment Rosagroprom, which operates in Russia, owns and and leasing operations, (e) consulting services operates about 711,000 trucks for use on the related to repairs and maintenance, (f) the roughly 26,000 state and collective farms in 88 Chapter 4 Russia. On average, there are between 20 and 100 farm-to-market hauling and Rosavtotrans in trucks per state or collective farm. The trucks haul distribution to retail outlets and longer hauls. agricultural products between farms and to food However, about 9 percent of Rosavtotrans volume processing plants and, are used to some degree in in 1991 was agricultural products, so there is not intercity transport. Reportedly, nearly half of the a complete separation between these two road Rosagroprom vehicles are small GAZ trucks with haulage sectors. less than 2.5 ton capacity. Only 10,000 trucks are In terms of tons hauled, truck is the dominant used in intercity and longer distance haulage. mode, with 60.3 percent of the market estimated Rosagroprom has only about 6,000 heavy for 1992 (exhibit 1.4). Of this, own account refrigerated vehicles for transport of perishables trucking accounts for about 80 percent of the road over longer distances.3 sector. About 4 percent of Rosavtotrans tonnage in 1991 was agricultural products. In addition, Agricultural Trucking. The Russian agricultural Rosagroprom handled 523 million tons in 1989, trucking industry is burdened with several equal to about 3 percent of other total road problems (a) trucking operations are very haulage. inefficient and poorly organized, (b) maintenance is concentrated and centralized over large Average Annual Utilization and Length of Haul. geographic areas, resulting in huge numbers of Interviews by three Bank missions in 1992 trucks awaiting maintenance far from users who analyzed the operations of several Russian might press for their more rapid repair, and (c) trucking enterprises in detail. Average annual the problems of agricultural trucking are utilization level of trucks was estimated at about aggravated by extremely poor equipment and a 40,000 km per truck, which reflects the short peak-and-valley pattern of demand related to the haul, intracity nature of most road haulage.4 planting and harvest cycle. Agricultural trucking Average lengths of haul are short, typically 20 km is thus likely to exhibit to an even more for own-account carriers and 25 km for common exaggerated degree the problems of the remainder carriers. Raw materials and containers tend to go of the trucking sector. For these reasons, it is by rail to distribution points, so drayage of those important that the principles of deregulation, commodities is over relatively short distances, like promotion of competition, and encouragement of bread and milk deliveries. Manufactured the entry of new firms be closely followed in any foodstuffs, perishables, and consumer goods have program to restructure agricultural trucking. a longer length of haul. Role of Road Transporl in the Russian Economy TrucAing in the Intercity Market. Hauls of 50 km or more are considered intercity traffic. On The Freight Task. Road transport is estimated to that basis, general purpose intercity road transport make up no more than 7 percent of total Russian was about 121.6 million tons in 1991, compared freight transport in terms of ton-kilometers (tkm) with 1,903 million tons for railroads, most of in 1992 and less than 2 percent of general purpose which could be considered intercity. Agroprom cargo handled by all modes (exhibit 1.1). This and international trucking do some intercity relatively small part of the transport sector's total haulage, but Agroprom figures are difficult to task reflects the fact that railroads perform more obtain and international truckers do very little than 54 percent of all freight tkm including domestic intercity hauling because it is not as pipelines, or 96 percent excluding pipelines. profitable as their primary market. The distance Own-account trucks, much like private carriers covered by intercity trucking, however, is much in the United States, are still the dominant part of shorter than rail. Statistics show that in 1991, rail the road transport sector, with over 77 percent of volume was 2,317.0 billion tkm, compared with total volume estimated for 1992. Rosagroprom, 24.8 billion tkm for intercity road. which controls most agricultural trucking handled 25 billion ton-kilometers in 1989, about 8 percent Surface Transport Demand. Overall demand for of total road traffic. Rosagroprom concentrates in transport has fallen steadily from 1989-90 levels 89 Chapter 4 Exhibit 4.1 Russian Trucking Fleet (thousands) Est. Proj. Proj. Proj. 1989 1990 1991 1992 1993 1994 1995 Total Fleet 2,646 2,552 2,753 Total Own Account Trucks 2,315 2,232 2,450 Total General Purpose 343 331 320 318 283 293 303 including: Rosavtotrans 310 278 268 254 246 242 244 including: Net Truck Additions -32 -10 -14 -17 -13 2 9 composed of: Trucks Acquired(New & Used) 40 31 25 25 35 53 63 including New Trucks 32 24 Trucks Written Off -72 -41 -39 -42 -48 -51 -54 includes Defect Rejections -31 -24 Agroprom 722 Note: Missing data not available Without Mosavtotrans and St. Petersburgavtotrans. From 1993, Russian joint stock trucking company, 'Rosavtotrans'. General Purpose Trucks (thousands) 350 300 250- 200- 150- 100- 60 M i - 0- -50 I -100Il 1989 1990 1991 1992 1993 1994 1995 Year F All Trucks E Rosavtotrans U Trucks Added U Trucks Written Off U Net Additions SOURCE: Ministry of Transport, RF, 4 November 1992 90 Chapter 4 and recovery is not expected in the near term. belonging to Agroprom (exhibit 4.1). A large According to MOT, in 1992, tkm by all modes number of military trucks supplement these fleets will have fallen by 30 percent from 1989 to 1993, and, if needed, could be pressed into civilian while total road tkm will have fallen by only 9 service, particularly at harvest time. Average age percent and general purpose freight by 15 percent. of the fleet is estimated to range from 3 to 8 Rail is still the predominant means of long-haul years. Statistics on the percentage of the fleet that transport for general purpose and own-account is out of service are also not kept, but unofficial freight and the relative increase of the trucking estimates range from 10 to 30 percent, depending share is almost unnoticeable (exhibit 1. 1). on how out of service is defined. The fuel Figures gathered from the Supreme Soviet in efficiency of the fleet is about half of western January 1993 indicate that motor transport actually standards for comparable-sized trucks. The carried 1,920 million tons in 1992, one-third less majority are powered by gasoline engines, since than the forecast level of 2,550 million tons and Russia has had chronic problems with substandard more than 40 percent lower than the 1991 level of diesel fuel, but a growing share of large trucks 2,731 million tons. While these figures are more used to carry common-carrier freight is diesel- recent than those provided by MOT in 1992, they powered. Bank estimates of effective staffing might not reflect the full range of trucking activity levels for one large auto transport enterprise were actually underway. The 40 percent tonnage drop 1.7 to 1.8 drivers per truck and 2 mechanics per might well be overestimated because (a) traffic vehicle under repair, far higher than Western counts for Federal roads reflect decreases in staffing levels. traffic substantially smaller than 40 percent, (b) As far as the carrying capacity of the truck fleet staff cuts in the oblast motor transport associations is concerned, MOT figures show a clear shift to have decreased effectiveness of the reporting larger vehicle capacity over the past 10 years system, (c) the reporting system for own-account (exhibit 4.2). Vehicles up to 5 tons have declined trucking tonnages has deteriorated, and (d) from 69 percent of the total trucks in 1980 to 42 moonlighting has grown, especially with own- percent in 1991. The average capacity of Russian account trucks that are chronically underutilized. trucks and trailers is estimated at 6.4 tons and 7.4 MOT's 1992 forecasts assume the economy tons, respectively, in 1991. The legal axle load bottoms out in 1993 and that the transport sector limit in Russia is 10 tons, but many of the roads recovers as industry gets back on its feet. They do are designed for axle loads of only 6 tons.6 In the not, however, forecast a return of traffic to pre- future, the agriculture and intracity markets will perestroika levels until after 1995. The MOT need more lightweight trucks, while the intercity numbers indicate a continued heavy reliance on market will require more truck/trailer the own-account sector of road transport and combinations up to 38 tons to meet market marginally less on the general purpose sector demands and provide better utilization over longer (exhibits 4.1 and 4.3).5 This seems to indicate distances. little understanding by the Ministry, however, of Except for the international segments of the the growth potential of intercity trucking as a trucking industry which have access to hard market economy begins to evolve out of the currency, however, Russia's trucking companies current recession, or it could indicate the cannot generally afford to buy new trucks in any Ministry's belief that own-account trucking will be significant numbers. This means that any more heavily involved in intercity traffic. requirement for added capacity will have to come principally through improved availability and Capacity of the Truck Fleet utilization of the existing fleet. The Minister of Transport addressed these issues in an interview: A reasonable estimate of the size of Russia's truck 0 "[I]n the structure of our motor vehicle fleet is about 3.25 million vehicles, which stock, we do not have enough small vehicles, includes about 2.2 million own-account trucks (68 dump trucks, and trucks of 14.5 tonnes and percent), about 320,000 for-hire trucks (10 larger, while we have a surplus of vehicles of percent), and about 720,000 trucks (22 percent) between five and 10 tonnes." 91 Chapter 4 Exhibit 4.2 General Use Road Transport Vehicle Load Capacity, 1970 to 1991 Category by Load Capacity 1970 1980 1985 1986 1987 1988 1989 1990 1991 Up to 2 Tons 20.9 32.3 33.9 36.5 37.1 35.9 35.4 28.5 25.2 2 to 5 Tons 223.7 168.3 135.6 130.7 125.8 118.4 108.9 94.9 88.5 5 to 8 Tons 33.9 52.9 62.2 70.7 71.3 74.9 77.8 75.1 74.4 Over 8 Tons 14.4 38.1 70.7 76.4 82.8 84.5 87.7 79.8 80.1 Total 292.9 291.6 302.4 314.3 317.0 313.7 309.8 278.3 268.2 Upto2Tons 7% 11% 11% 12% 12% 11% 11% 10% 9% 2 to 5 Tons 76% 58% 45% 42% 40% 38% 35% 34% 33% 5 to 8 Tons 12% 18% 21% 22% 22% 24% 25% 27% 28% Over 8 Tons 5% 13% 23% 24% 26% 27% 28% 29% 30% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% Russian Truck Fleet by Vehicle Load Capacity (thousand units) 250.0 1970 1990 1991 ~Up to 2Tons 2 to 5Tons tZS5to 8Tons IIlOver8 Tons SOURCE: Ministry of Transport, RF, 21 May 1992 92 Chapter 4 "Motor vehicle transportation workers have forecasts through 1995 shows that capacity is very to worry not about how to buy more motor likely to exceed demand, and probably by margins vehicles, but how ... to develop ... [a] structure for greater than expected, since the demand forecasts more effective use of motor vehicles." used in the analysis are optimistic judging by * "Up to 40 percent of the motor vehicles' more current macroeconomic indicators (exhibit working time is spent in loading and unloading; 4.3). The capacity analysis is based on (a) MOT statistically, they travel empty a little less than 50 figures regarding the number of trucks by tonnage percent, and at both ends they are loaded at no category, (b) differing out-of-service ratios, and more than 18-20 percent of their capacity. And (c) differing annual utilization levels in kilometers both their carrying capacity and their trailers are per truck. Capacity is compared to two demand not always fully utilized. forecasts (a) one provided by MOT as detailed in * "As you can see, we have enormous exhibit 4.2, and (b) one derived for the for-hire reserves. It is simply a matter of exploiting them industry from EBRD railroad consultants' overall quickly and intelligently."7 forecast of the entire road transport industry.8 Based on Bank analysis of truck capacity and The operational capacity of the fleet - future demand, truck capacity will be sufficient to calculated on the basis of out-of-service ratios cover the expected growth in road traffic through steadily worsening from 20 percent to 30 percent the next few years, particularly since the present over 3 years and an assumed average annual level of equipment utilization is low by world utilization of 52,000 km per year - exactly equals standards and likely to improve substantially with the tkm performed in 1990, 1991 and 1992 privatization. Comparing the truck capacity of the (exhibit 4.3). Three levels of capacity are general purpose trucking fleet with demand projected for 1993, 1994 and 1995. At these Exhibit 4.3 Actual and Forecast Truck Capacity vs Transport Demand in the Russian For-Hire Trucking Industry, 1990 to 1995 90 (billion tkm) 80 70 --- 4r 40 30 20 I0' 1990 1991 1992 993 1994 1995 tIruck capacity with IiI implied MOT capacity truck capacity with greater availability forecast based on more intensive (20% out of service) fleet projections (30% utilization (80,000 out of service, 52,000 km/yr) kmlyr) ~-~ MPS-reported actual -{} MOT for-hire (1990 - EBRD for hire (1990 task performed and 1991 are MOT- and 1991 are MOT- reported actual task reported actual task Source: Compiled from MPS, MOT, and EBRD-provided data. performed) performed) 93 Chapter 4 levels, the fleet is not sufficient to meet either trucking capacity necessary to meet demand. The forecast in 1993 but is adequate to meet the EBRD government, therefore, can and should discontinue forecast. Instead of buying new trucks to meet its programs of directed credits for truck demand, however, substantial effective capacity acquisition and other forms of subsidization to can be added either by reducing out-of-service trucking enterprises without concern that the ratios or by increasing truck utilization. market for road transport will not be adequately Investment in spare parts, to the extent they are served. available, will reduce the out-of-service ratio and is clearly an effective way to add capacity. An Structuring of a Private and Competitive even more effective way, however, is to obtain Trucking Industry greater use from each vehicle in the fleet. Fortunately, the latter is virtually a guaranteed by- Compelling economic evidence from developed product of privatization. Experience throughout and developing countries around the world the world demonstrates that utilization rates of indicates that Russia's motor freight industry must privately owned vehicles are substantially higher grow quickly and soundly. Otherwise Russia's than those of state-owned enterprises. In some transport and logistics system will act as a brake countries it is not unreasonable for utilization by on economic growth in the long term and hinder private trucks to be twice as high as those publicly the rapid and effective transition to a market-based owned and operated. By world standards, truck economy in the short term. This evidence also utilization rates in Russia are low. In the United demonstrates that, without successful reform, the States or Western Europe it is not unusual for motor freight industry will develop neither the utilization to exceed 120,000 miles, or nearly type and quantity of services that the new and 200,000 km, annually. If average truck utilization growing elements of the economy require nor the were to increase in Russia to only 80,000 km per practices needed to exploit the large reservoir of year, total fleet capacity would far exceed demand unused transport capacity in the existing trucking levels. fleet. These conclusions are even more likely to hold There are, however, major problems in the path true in view of the fact that both MOT and of motor freight industry reform. One very EBRD-based forecasts probably overstate future serious problem impeding the development of a road transport demand. Both misjudged the extent market-responsive trucking industry is regulation of the 1992 decline in demand, and both predict a of rates by the government.9 Although turnaround in the economy inconsistent with conversations with MOT officials indicate that current conditions and the most recent forecasts in there is not currently any regulation of motor economic activity. The fact that the decline is freight tariffs by the central government, there likely to be lower than predicted is buttressed by does appear to be some de facto regulation of the fact that a recently reported figure for the total rates at the municipal level on those contracts that tkm transported by the for-hire trucking industry are held by for-hire trucking enterprises and that is well below the EBRD-derived forecast and pre-date privatization. There are also some MOT's estimated 1992 level. The figure in indications that oblast governments are moving question appeared in a recent MPS publication toward regulation of trucking rates in a manner and, if accurate, portends an even greater excess that would restrict the free movement of goods of trucking capacity than shown. Given the both within and among oblasts. Irrespective of the additional truck capacity available from the level of government at which such authority military and underutilized own account trucking resides, it should be removed altogether to ensure fleet, it is clear that trucking capacity should not rapid development and efficient growth of a be a problem in the medium term and possibly not competitive trucking industry. even 4 to S years from now. A part of the privatization process there is a The Bank's capacity analysis means that need to cancel the old haulage contracts for trucking enterprises can rely on increased government enterprises, which specify obsolete utilization and private financing to maintain the rates inappropriate to a free market. MOT 94 Chapter 4 officials indicate that such contracts may affect as percent) of the 1,500 enterprises under their much as 80 percent of for-hire truck traffic."0 jurisdiction had been privatized, or plans for These contracts should be replaced by new, privatization had been approved or documented. freely-negotiated contracts which recognize full One major reason for the slow pace of trucking cost levels, take demand and carrier performance enterprises being privatized was the government's into account, and have provisions for inflation concern that privatization would conflict with the adjustments. designation of certain trucking enterprises and vehicles were designated as reserves for defense Industry Structure and Privatization. There is mobilization. Each of these 1,500 enterprises had considerable potential for the development of road assets in excess of 1 million rubles (US$2,500 at transport that is more suited than are railways to the November 1992 exchange rate of 400 the transport demands of a market economy. Rb=US$l) and half had more than 10 million. Unfortunately, without a move to private None had assets in excess of 50 million rubles.'" ownership and market competition, it is highly Not included in these figures are the trucks and unlikely that an efficient, responsible market in enterprises owned by Agroprom or own account trucking services will develop, or that non- trucks. Agroprom did confirm they have budgetary incentives to improve the quality of privatized trucking operations in every oblast.'2 trucking services can be brought to bear on the The first highly-publicized auction was held in trucking industry. Nizhniy Novgorod in October 1992. Over 200 The privatization process that has been initiated trucks were auctioned at prices ranging from so far carries with it the possibility that the US$250 to US$2,500. No more than five were existing mega-enterprises, under which separate bought by the same group, so individual owner- trucking units have been allocated geographic or operators were created through this method of commodity-specific monopolies, will be privatized vehicle redistribution. Local government and the and remain inefficient. Such monopolies should be privatization committee, working closely with broken up and subjected to competition by IFC, required that the general purpose road breaking the link between the holding company transport companies being privatized in the oblast and its subsidiary enterprises and by privatizing put up 20 percent of their trucks for auction. To the subsidiaries and allowing them to compete ensure that not just old or out-of-repair trucks freely. As part of the privatization process, were auctioned, each company had to contribute separate enterprises should be created from those equipment with the same average life and enterprises that operate both buses and trucks, condition as the vehicles being retained. All of the except for very small enterprises in rural areas trucks were successfully sold in the auction, with possessing only a few vehicles. Competition payment in the form of cash and privatization should also be enhanced by encouraging new vouchers. entrants into the trucking business, by keeping The auction method of redistribution helps barriers to entry low, and by auctioning part of create a level playing field by giving both the existing company fleets to the private sector. established companies and new entrants the same Some of the more progressive oblasts are kind of equipment at similar price levels, rather beginning to initiate such reforms, and IFC and than forcing the latter group to pay for new the Bank are advising the government on trucks. With the sharp decline in demand for auctioning off part of the existing trucking fleets transport, auctions will make unused equipment of the large trucking enterprises. As an incentive available for use by those who see an immediate for enterprises to auction off trucks during need. It is possible that the new drivers or owner- privatization, the government should permit the operators could very well be drivers of company- enterprises to keep the proceeds of the auction, owned equipment who are not working because of whether in currency or vouchers. lay-offs or lack of business. Once the initial privatization process is over, the Current Status of Privatization. By mid- real challenge will then be to restructure a new February 1993, MOT indicated that 314 (or 20 trucking industry. 95 Chapter 4 Description of the Nizhegorodskaya Oblast Freight Transport Organization TPO *Nizhegorodavtotrans" (TPO) is the common carrier trucking company for the Nizhegorodslkaya oblast. Consisting of 42 enterprises, the TP) performs more than 90 percent of the for-hire freight haulage in the Nizhniy NoYgorod oblast with more than 10 percent of all trucks in the oblast. According to the charterof the organization, it is a legli entity and. a, part of 'Rosavtorans". The TPO employs more than 18,000 people and has over 8,000 trucks and 735 buses throughout the oblast. The TPO expedites a variety of hauls and is the monopoly in haulage of certain goods. The TPO enterprises are located in the cities of Nizhniy Novgorod, Bogorodsk, Dzerzhinsk, Lyskovo, Pavlovo, Semenov, Uren, Bor, Balakhna, Lukoyanov, Sergach, Shakhunya, Pervomaisk, Viksa, Zavolzhe; in the workers settlements of Kovernino, Pochinli, Voskresenskoye, Navashino, Vetluzhsky, B. Murashidna, Vorotynets, Sosnovskoye; in the iaor and Shatky rural areas, as well as the Kamenishenskoye enterprise. The local multi-service providers operate all common carriage, for a particular region, regardless of the products shipped. Rather than specializing in a type of service, they have defined their business based on the needs of the region. Within the city of Nihnhiy Novgorod, trucking enterprises demonstrate a greater degree of specialization. Although the enterprises often have a geographical focus toward their districts, they specialize in particular types of haulage. For example,-POGA 2 transports all the petroleum products in the city, while POGA I transports all the milk and bread. The enterprises located in Nizhniy Novgorod are generally much larger in size than in other cities. Eight support enterprises provide a variety of services: truck maintenance and repair, spare parts supply, communications service, construction, unloading and terminal operations, engineering services, computer services. These enterprises usually have less employees than other truck transport enterprises. Data on the TPO Enterprises: Entetprises Nulmber of Trucks mixd truck/passenger 21 average number of trucks 286 trucks only 12 highest number of trucks 1,500 subdivision of central services 7 least number of trucks 26 othet 3 total number of TPO trucks 8,112 located in Nizhaiy Novgorod 18 located outside the: city 25 Number of Workers Number of Passenger Buses average number of workers 483 average number of buses 38 :the highest number of workers 3,000 highest number of buses 71 the lowest number of workers 60 least number of buses 14 total :number of TPO workers 18,362 total number of TPO buses 735 Source: Intertnational Finance Corporation Model Privatization of Truckdng, First Use of Vouchers In Russia. pp 3-4. * Company Management. Management will laying off staff, finding parts, and financing have to change orientation from a command to a operations are causing management to move market economy at the worst possible time - a slowly, since such steps are foreign to their past world-wide recession with severe internal policies and practices. economic conditions. The difficult tasks of 0 Owner-Operator Education. Individual eliminating or reducing social or welfare services, entrepreneurs in road transport are facing a 96 Chapter 4 different challenge. New truck owner-operators a non-governmental association, ASMAP. Control are concerned about competing with, and winning of a restricted entry industry via such a cartel is business away from, their former enterprises. anti-competitive and will ensure that Russia's Because of the need to accrue depreciation, beleaguered economy pays much more than it anticipate taxes, and analyze costs per km to haul should for transport of exports and imports freight, new owners need some basic education in moving by truck. how to run their businesses. * Other Important Policy Objectives. A * Transport Service Enterprises. The evolving properly structured private trucking industry private sector for truck parts, repairs, tires and should also reflect policies that promote (a) fuel will determine the rate and breadth of dividing the combined freight and passenger development in intercity transport by new and operations of mixed operating companies into existing firms. For example, today there is neither separate operating companies, (b) extending the a private nor a state-owned source of repair parts auctioning of trucks in the privatization process to or tires on the 680-km highway between Moscow Agroprom trucks, and (c) preventing the and St. Petersburg. Unlighted public repair parks development of barriers that discourage or restrict are available, but drivers must be their own entry into trucking. mechanics. Food service is generally available only in towns and cities along the way, with Near-term Recommendations business hours from 7 am to 9 pm. Night driving is further hindered by lack of reflectors on roads Complete privatization of road transport and on other vehicles, making driving unsafe even enterprises under a modified directive that on stretches of relatively modern highway like the encourages auctioning a substantial portion of the Moscow-St. Petersburg route. If a trucking fleet as rapidly as possible. The government's company or owner-operator wants to start hauling policy of moving promptly to privatize trucking as between those two points, it must ensure that part of the overall privatization program is to be potential repair parts are on board the truck and commended. No opportunity should be lost to help that the driver knows how to make repairs. In restructure the industry on a more competitive addition, transit will be limited to daylight hours. basis during the privatization process. This should The government must act to privatize and include ensuring that when buses and trucks are restructure service areas so that competition can mixed in the same enterprise they are separated in operate effectively and monopoly vendors do not the privatization process. have power over trucking firms, either directly The most effective way to do this is to through market power or indirectly through poor encourage the auctioning of trucks as part of the services and products. Whenever the government privatization process by permitting the enterprises has control over specific franchises, such as the to keep the proceeds of the auction, in currency or way stations along major roadways, it should act vouchers. To increase effectiveness, the to introduce competition through competitive privatization process, including the optional contracting. auction, should apply to all own-account trucking, * Changes in the Associations. The monopoly particularly Agroprom, as well as to the for-hire powers that remain in the trucking associations trucking sector. The government should also take must be divested and a private, competitive measures to promote more rapid and complete market structure for these services must be privatization by removing the restriction against fostered. Associations could remain valuable to privatization of companies or individual vehicles newly privatized trucking companies by providing with mobilization reserve assignments. These information, representing them before assignments can be maintained easily within the governmental bodies and offering appropriate context of a privatized company or privately forms of training. owned vehicle. * Monopoly Control of International Trucking. A separate issue from domestic trucking is the Improve competitive structure by permitting easy control of Russia's international trucking through entry of new trucking operators: Agroprom, other 97 Chapter 4 own-account truckers, freight forwarders, etc. effective support for a private and competitive Besides fostering entry through truck auctions, the trucking industry. government should remove any barriers that keep truck owners from participating in the commercial End any MOT or other government-sponsored trucking marketplace. Own-account truckers, for program of subsidized financial assistance, example, should be permitted to hire out for including leasing, for acquiring trucks. For a commercial loads when they are not carrying their trucking industry to be viable, it must generate enterprise's freight on back-haul movements. true profits that include the cost of capital as a result of its ongoing operations. Grants or other Remove or eliminate any geographic or forms of subsidized financing for trucking commodity-specific monopolies or other operators distort this process by (a) allocating restrictions on effective and efficient operations. trucks on the basis of political or geographic Other barriers to efficient trucking include the criteria, (b) sending wrong signals to truck restriction of competition through limitations on manufacturers in terms of the demand for and the commodities that can be hauled, the area that acceptability of their products, and (c) relieving can be served, or the ability to move over-the- otherwise strong and useful pressures on trucking road at night. Such restrictions substitute the operators to extract more use from their existing government's decision for that of the trucking truck fleets. Such programs also waste scarce the operator as to priority or opportunity. Arbitrary government resources. restrictions on night driving reduce truck utilization and restrict the ability to serve To support development of a private trucking customers during normal business hours. industry, the government should lease surplus military or other facilities that can be used as Maintain present policy against federal rate terminals or warehouses. Development of a regulation. Government-prescribed or approved healthy trucking industry requires competition and rates serve as another impediment to efficient entry. New operators require terminals and trucking. They restrict the responsiveness of the warehouse facilities which are difficult to obtain in trucking operator to the demands of the the Russian real estate market. The government marketplace by requiring the delay of regulatory can provide stop-gap assistance by making approval to set or change rates. They tend also to available to truckers excess facilities suitable for substitute social or political considerations for these purposes. This should be done without economic or financial ones, making it difficult to government interference into the operations of the operate a trucking firm profitably when no users, and the facilities should be available competent operator is willing to provide services, without discrimination to all users. the government should let bidders compete to provide services under contract at the lowest cost. Medium-term Recommendations The central government's removal of tariff controls is to be commended and it should enforce Formalize and expand the program of de- a similar removal of controls at the oblast and monopolizing the provision ofauxiliary services by municipal levels. offering concessions to operatefacilitiesforfuel, spare parts, maintenance, food and lodging along Privatize and de-monopolize auxiliary services. major intercity highways. Short-term measures to If fuel, spare parts, maintenance and other dismantle the monopolies in auxiliary services auxiliary services are controlled by monopolies, should be followed up with concrete steps to they can be used for anti-competitive purposes by foster expansion of competitive services those who control the monopolies. The throughout the motor transport sector. Such government needs to break up such monopolies services will aid not only freight transport, but and promote competition to improve the quality of also automobiles and buses. One useful approach auxiliary services provided and to provide is to let contractors bid for concessions to operate 98 Chapter 4 such services along major motorways on well supply of, trucking and thus the healthy situated parcels of government-provided land. development of the trucking industry. Develop or adapt training manuals and Stop providing terminal and warehousefacilities computer software for Russian trucking firns to either through privatization of facilities provided aid them in such areas as maintenance, operations under the stop-gap program or cancellation of planning, bookkeeping, and marketing. Managing existing leases. Government actions appropriate a private trucking firm requires skills that did not and necessary in a transition period are not exist under the command economy. The necessarily so in a more stabilized environment. government should assist the associations with To avoid distorting the marketplace for developing and disseminating such materials to warehouses and terminals, and to get out of a new and newly-privatized trucking enterprises. business that the marketplace can handle without government interference, the government should Coordinate and implement night driving safety terminate its short-term terminal and warehouse measures. A key requirement for a productive program. trucking industry is the ability to move over the road at night. To ensure that this can be done as Long-term Recommendations safely as possible, the government should prescribe and enforce reasonable visibility Develop an appropriate set of safety and standards for lights and reflectors on vehicles and environmental standards for trucks. An infrastructure. appropriate role for the government when the trucking industry has stabilized is to prescribe Reform the allocation of international trucking reasonable safety and environmental standards for operating certificates now handled through a non- the design and operation of trucks. At this stage it governmental body, ASMAP. Russia's rights to will be possible to understand and quantify the engage in international trucking operations are financial performance of private and competitive gained as a governmental prerogative through Russian trucking operations. It will also be negotiations with other governments. The possible to quantify the added cost of allocation of those rights to private parties, manufacturing for various alternative levels of therefore, should be done by the government standards. With this information the government under fair and open procedures to which all can base its decision on a judicious evaluation of parties are privy. ASMAP, the Russian the costs and benefits of the standards it chooses. international trucking association, a private body, should be removed from the role of controlling these government-created rights, and an Notes appropriate government regulatory body should be charged with distributing them. 1. Total registrations, including personal trucks, amount to 44.5 million. There are also 3.6 million Develop a body of vehicle licensing and commercial trailers registered in the US. Source: operating specifications that will not impair the American Trucking Trends, 1991-92 Edition, most economical and efficient use of the existing American Trucking Associations, Alexandria, VA truck fleet or raise the cost of new trucks to uneconomic levels. Because of the need for 2. In the United States, 7.8 million people work dramatic structural and operational reforms in the in trucking throughout the economy, including 2.6 Russian trucking industry in a time of grave million truck drivers. economic difficulties, the trucking industry must be left as free as possible to acquire, license, and 3. O&C/Consultex, Soviet Food Supply and operate trucks. Any arbitrary restrictions, other Distribution, An Overview of Transport and than minimum prudent safety requirements, could Logistics Support Systems, Volume I: Summary gravely raise the cost, and thereby affect the Report (London: EBRD 1992), p 21. 99 Chapter 4 4. Interviews with trucking enterprise officials, Automobile Transport magazine, reported in FBIS- World Bank mission team, Moscow and Kursk, USR-93-015, 10 February 1993, p 48. RF, March and July 1993. 5. Agroprom officials' discussions with World 8. Booz Allen & Hamilton/Travers Morgan. Bank mission. Reliable and comparable statistics EBRD Railway Sector Survey of the Railways of are difficult to obtain. MOT was not able to Russia, Ukraine, Belarus, and Kazakhstan, provide updated numbers other than freight London: July 1992, p 20. volumes and fleet size, and both were incomplete. While a solid, current statistical base would be 9. Interviews with MOT officials, World Bank preferable, it is believed the numbers in this mission, Moscow, RF, June 1993. report, taken as a whole, accurately portray what is happening in the present, rather chaotic 10. Interviews with MOT officials, World Bank environment. mission team, Moscow, RF, March 1993. 6. COWI-TecnEcon J/V, Roads and Road Transport Study - Draft Final Report (London: 11. MOT officials, World Bank mission findings, EBRD 1992), p 79. Moscow, RF, 6 November 1992. 7. Interview of Minister of Transport of the 12. World Bank Mission findings, Moscow, RF, Russian Federation Vitaly B. Efimov with 27 October 1992. 100 Urban Passenger Transport Nature and Scope of the Urban Public small buses 2.3 percent. Commuter rail service is Transport Problem a significant form of suburban travel in larger Russian cities, especially in Moscow and St. With 75 percent of its population living in urban Petersburg. The Russian urban public transport areas and car ownership only about 6 cars per 100 fleet is among the three largest in the world; only inhabitants compared to over 40 in Western China and India have fleets of similar size. Europe, Russia is more dependent upon public There are an estimated 300,000 buses in Russia, transport services than any other nation with a of which 131,000 are in fleets providing regularly similar level of income. In 1991, urban and scheduled services. The remaining 169,000 are suburban transport, by bus, tram, and trolleybus, predominantly owned by enterprises and other carried 41.8 billion passengers, representing about entities that provide services to their employees. 85 percent of passenger transportation by all Approximately 80 percent of the 131,000 fleet modes. This compares to an urban transport share buses provide regularly scheduled urban and of overall public transport in Western Europe of suburban service; 20 percent have intercity about 20 percent, and in the United States of service. There are, in aggregate, 8,700 urban about three percent. If public transport companies routes, 18,600 suburban routes, and 10,600 do not work well, then neither do Russia's cities, intercity routes. In addition there are households, factories, offices, schools, or stores. approximately 15,000 trams and 14,000 Russian cities are served by a variety of trolleybuses. passenger services. Bus services are provided in 1,854 urban settlements throughout the Despite the large scale of the urban public Federation. Some form of electric-powered transport fleet it is small given Russia's high transport service is provided in 101 cities, dependence on public transport. The fleet including 85 cities with a trolleybus network and currently averages slightly over one vehicle per 70 cities with a tram network. Five major cities thousand population, including a large percentage are served by a subway or metro system: of vehicles currently not operational. About 70 Moscow, St. Petersburg, Nizhni Novgorod, percent of the fleet is available for operation on Samara, and Novosibirsk. Only the Moscow and any given day. This is less than in the four major St. Petersburg systems capture a high percentage European Community (EC) countries where of total trips. Overall, bus services account for an personal means of transport are much more estimated 64.4 percent of all urban passenger widespread. As a result, the degree of personal trips; trolleybuses and trams 18.5 percent; metros mobility in Russian cities is considerably lower 7.8 percent; suburban rail 7 percent; and taxis and than in Western European and other developed 101 Chapter 5 nations. This has an enormous impact on labor exchange and general financial conditions, an efficiency. increasingly significant percentage of basically Buses, which account for the bulk of the urban sound public transit vehicles are being sidelined public transport fleet and personal travel, are because of a lack of critically needed spare parts. excessively fuel inefficient and polluting. Over This is particularly true of the significant number half of the bus fleet is powered by gasoline of Ikarus buses imported from Hungary and Tatra engines rather than more efficient and less trams from former Czechoslovakia. A further polluting diesel engines. This is one reason why significant percentage of vehicles is aging beyond many cities have given priority to electric a reasonable service life. As a result, many transport. transport entities have lost as much as a third of In the last two or three years since the their daily operating bus fleets. A minimum of a government began to limit the use of critically 10 percent annual attrition rate - more likely 20 needed foreign exchange for buying new buses, percent for buses - can be expected under current trolleys, and associated spare parts, urban public conditions unless action is taken to correct the transportation service has deteriorated sharply. situation. The implications for a nation that is This problem has been accompanied by the over 70 percent urbanized and already suffering breakup of the Eastern European trade block from a lack of mobility are serious. (CMEA), where at least a third of the current Central and local governmental officials are urban bus and tram fleets have been manufactured aware of the issues outlined above, but a clear and mainly in Hungary and former Czechoslovakia. practicable strategy for dealing with the continuing According to MOT figures, the number of Ikarus decline of urban public transport services has yet buses imported from Hungary dropped from 3,100 to emerge. The central government, through in 1988 to a mere 50 in 1992. According to MOT MOT, continues to provide some funds to local figures, the number of Ikarus buses imported from governments for the purchase of new buses and Hungary dropped from 3,100 in 1988 to a mere spare parts, but these funds are minimal in 50 in 1992. Overall Russia's passenger carriers relation to needs. Laws and decrees providing for received 19,500 buses in 1985, 16,200 in 1990, transfer of urban transport assets to local 14,300 in 1991 and only 8,900 in 1992. The governments and permitting the privatization of problem has been further aggravated by the assets are steps in the right direction, but these breakup of the FSU, causing further disruption in provisions are only in the formative stages of acquisition of additional parts and equipment from implementation. outlying republics. Moreover, transport entities are experiencing a The Russian government, through the Ministry general decline in financial conditions caused by of Industry, is continuing a program begun by the rapid increases in costs, increasingly limited local former Soviet government to develop local government budget allocations available for manufacturing capacities to provide adequate transport subsidies, and passenger fare evasion, urban buses and other public transport vehicles. presumably all caused by the overall decline in This program, however, suffers from a lack of economic conditions. The historically high public funds. The potential for foreign investment dependence on subsidies - typically at least 70 is not high given the absence of both a convertible percent of operating costs - and the legal currency and a legal, commercial, and financial exemption of one third of the population from framework in which such investments can be paying any fare will not make the current situation secure. Local governments, having only recently easy to correct. In some localities, additional inherited the authority and responsibility for exemptions enacted at the oblast and municipal providing urban transport services, are trying to level reportedly have brought exemptions closer to cope, but are having only marginal success. 70 to 80 percent of the population. Lacking spare parts, many local transport entities have resorted to ad hoc manufacturing Increasing Out-of-Servwie Ratio for the arrangements and cannibalization of vehicles to Transport Fleet. As a result of these foreign keep their existing fleets operating. The major 102 Chapter 5 underlying problem, however - a lack of funds even compared to high income market economies generated by the transport entities, and the lack of that can better afford them and that have much alternative subsidy sources - has not been lower levels of ridership. Given current and meaningfully addressed by any level of foreseeable future economic conditions it is clear government. that urban transport systems cannot be maintained with high subsidies, and that the services they What Government Must Do. To cope with this provide will continue to decline unless a much situation and then solve it, government must greater reliance is placed on recovering costs from achieve three principal objectives. riders. * Increase bus, trolley, and tram service capacities through repair, rehabilitation, and Implementing Cost Containment. Based on replacement of their fleets on both an emergency preliminary mission investigations, there is scope and a permanent basis. for realizing substantial savings through cost * Assist urban public transport systems to containment measures. These measures will likely improve their operations to a financially include (a) route rationalization among buses, sustainable basis through a variety of reforms. trolleys, and trams, (b) higher vehicle * Spur indirectly the development of a maintenance productivity, (c) reduced staffing stronger domestic industry for manufacturing levels, and (d) impiementation of cost accounting. public transport vehicles through a series of carefully structured steps. Developing Effective Organizational Structures and Improving Capacity to Manage Costs. Options for Government to Consider Numerous organizational reforms are needed to enhance the financial independence, To mount an effective attack on the massive accountability, and efficiency of urban public problems facing Russia's urban public transport transport entities. These reforms should include industry, the government should consider a establishing independent transport enterprises number of potential ways to reform the financing, outside oblast and municipal governments, management, operations, and structure of the divesting non-transport commercial activities, industry. The major potential approaches are privatizing taxi services, and separating outlined below. operational and regulatory functions to encourage competing public transport services. Severing Improving Cost Recovery. At present, at least urban bus services in major cities from their one-third of the total population in Russian cities parent oblast level auto transport operations - legally rides public transport free of charge, and which also handle inter-city bus and trucking in some locations, exemptions are reportedly services - is a particularly important. Once urban available to 70 to 80 percent of the population. An bus operations have been corporatized as separate additional one-third of the population is apparently operating entities, a concerted effort is needed to illegally evading payment of fares - Moscow improve their cost accounting systems and to authorities reported that during the past year fares enable their managements to better calculate and were tripled while collections only increased 60 understand the full costs of bus operations. percent. Moreover, fares are set very low relative to costs. As a result, passengers of most urban Designing an Effective Emergency Program for public transport systems are paying at most only the Remanufacturing and Re-Engining of Buses. 20 to 30 percent of total operating costs; when Implementing these policy measures will stabilize capital costs are taken into account, passengers' and reverse the financial crisis of urban public share of costs covered by fares may be as low as transport. To reverse its physical crisis, an 10 to 15 percent. This share would be even lower emergency program is needed to reverse the if highly subsidized fuel costs and other hidden shrinkage of the urban transport fleet, particularly subsidies were taken into account. Consequently. buses. Specific attention needs to be given to re- the level of public transport subsidies is very high engining the fleet, since low-quality engines are 103 Chapter 5 one of the major causes of out-of-service buses. If effective, and more capable of covering capital a coordinated program were developed among the costs. cities, it might be possible by effectively tendering for large orders to re-engine and remanufacture The set of reforms comprising cost recovery, bus fleets, particularly if hard currency were cost containment, and organizational available to finance any necessary foreign imports. improvements is essential if urban public transport Federal financing may be necessary to initiate this systems are to be sustained at acceptable standards process. as Russia moves to a market economy. A unifying approach for marshalling solutions to the problem Creating a Domestic Equipment Manufacturing is needed. The approach for agreeing upon and, if Capability. With the demise of CMEA, and the agreement is reached, for ensuring the breakup of the USSR, Russia is left with a implementation of such reforms is discussed in domestic public transport equipment terms of short, medium and long-term measures. manufacturing industry that is not able to meet acceptably even half its needs. Particularly critical Near-term Recommendtons is the need to either manufacture or import sufficient quantities of basic urban buses with Implement emergency measures to maintain acceptable environmental and fuel efficiency service levels. The Russian population depends standards. A fundamental issue is how Russia ultimately upon urban public transport for the vast should address this problem. The choices are bulk of its local passenger transport needs. Some essential requirements for spare parts are being 3 Direct investment in one or more met through the World Bank's First Rehabilitation manufacturing facilities. Loan (Ln. 3513-RU). Other emergency 3 Encouraging foreign-local joint ventures. approaches to consider include developing and 3 A combination of the first two options. implementing an effective program for the * Importing large numbers of the needed emergency rehabilitation and re-engining of new vehicles and equipment. buses, and opening the market to new entrants, such as jitneys and taxis, to provide more capacity To date the government has developed plans to and greater efficiency. increase manufacturing capacity for three types of buses as part of an overall program aimed at Formulate a short-term strategy for keeping the increasing production of equipment for the road existing urban transportfleet operating. Russian transport sector.' Direct investment by the and international experts should begin at once to government in particular manufacturing activities, perform a prompt and thorough review of the could undercut efforts by others to participate in scope of the immediate requirements for this potential market. retrofitting, overhauling, or remanufacturing existing urban public transport equipment and the A more productive result might be achieved if most promising options for meeting these the government were to use its financial backing requirements. to encourage competition among possible manufacturers, including foreign local joint Develop new specifications for buses suitable to ventures. Importing large numbers of vehicles is the Russian climatic, service, and operating really only a short-term option since the cost of environment. A precondition to the manufacture of doing so is prohibitive to local bus companies that significant numbers of new urban passenger are not even able to cover much more than 30 transport vehicles is the development of percent of their operating costs. In the longer specifications that correct the inherent deficiencies term, the domestic bus manufacturing industry of existing Russian equipment while meeting the will be stimulated most effectively if urban bus requirements of the difficult Russian operating operations became more efficient, more cost environment. 104 Chapter 5 Define and reach consensus on the basic engines, improved transmissions, and rustproofing elements of a reform package for the provision, of underbodies. financing, and management of urban public transport. The structure, management, operations, * Introduce competitive bidding for the financing, and maintenance of urban public purchase of more fuel efficient and longer lasting transport need reform. The World Bank is buses than those now domestically manufactured. working with Russian transport officials to develop a reform package that will address these * Use government support to the sector in the needs. form of capital grants to reduce operating subsidies and bring about greater cost recovery of Medium-termn Recommendations urban transport operations at the local level. Ensure that the preconditions for effective Long-term Recommendations manufacturing of new urban transport equipment in Russia are in place. Though not directly a Privatize intercity buses. For the level of responsibility of MOT, ensuring effective bus passenger densities that Russia generates, there is manufacturing capacity and quality is a matter of no reason why intercity passenger transport cannot vital concern to those responsible for urban be privatized. In cases where service cannot be transport. MOT should be a strong advocate for self-sustaining, the private companies serving creating the necessary preconditions for effective profitable route systems can compete to provide manufacturing; specifically by supporting a legal services under government contract. and regulatory framework that fosters investment, licensing, and joint ventures, and a purchasing Complete devolution of transit to municipal or process that promotes a private, competitively- local levels. With the most turbulent of the social, structured transport equipment manufacturing political, and economic adjustment completed, it industry. should be possible to transfer responsibility for urban public transport. Implement the reform package to improve the financial and operating performance of urban Promote manufacturing of improved urban public transport. A sound reform package should transport vehicles through licensing and joint accomplish the following goals: ventures. MOT should continue to advocate _ De-monopolize the urban public transport policies that will result in the effective private organizations. development of the transport equipment * Rationalize the structure of subsidies. manufacturing industry. * Adopt transparent accounting procedures. * Implement cost recovery measures. End parastatal operations; maximize private * Implement operating cost reduction provision of urban transport services through procedures. contracts with private corporations. Implementing * Introduce competitive bidding among private policies designed to maximize private participation companies for services on marginal routes and for in urban transport should enable disestablishment general services such as maintenance. or disintegration of many of the large, vertically- integrated parastatal monopolies involved in transit Refine specifications for improved urban operations. Even in cities such as Moscow, St. transport equipment. With the perspective Petersburg, and Nizhniy Novgorod where available by this time, it will be possible to integrated systems such as metros operate, it is evaluate the adequacy of the bus specifications possible within a framework of integrated that were developed earlier, to determine if operations to contract out some bus routes to revisions are required. Preliminary analysis shows private mini-buses and to use private garages for a need for improved fuel efficiency and better equipment maintenance and rehabilitation. 105 Chapter 5 Note 1. Program for Increasing Production of Buses, Specialized Rolling Stock, Equipment, and Spare Parts for General Use Automobile Transport of the Russian Federation. Summary of program objectives provided to World Bank mission, Moscow, RF, November 1992. 106 6 Highways The Highway Network and Denmark (10,000 km/mn) and the United States (14,300 km/mn). Currently Russia's public road network totals only By western European standards, traffic volumes 453,000 km, of which 38,700 km or 9 percent are on the Russian public road system are quite low classified as federal roads. All but three percent of because of low car ownership and the small federal roads are paved (exhibit 6.1). 414,000 km, amount of freight transported by road. Private car or 91 percent, of public roads are classified as ownership was severely restricted in the past and regional, of which 47 percent are paved. Only current free market prices put car ownership 2,600 km of roads are four-lane or more. In beyond the means of most people. Traffic on addition, there are 450,000 km of enterprise roads federal roads averaged 4,500 vehicles per day that belong to the Ministries of Agriculture and (vpd) in 1991, while traffic on regional roads Forestry, gas and oil companies, and to other averaged 1,050 vpd. Trucks made up about two enterprises. Some 700,000 km of other roads, thirds of total traffic and buses a further 6 many of which are not included in the official percent. Traffic growth has been quite low over statistics, are primarily earth access roads or the past six years, averaging only 2.6 percent tracks to agricultural farms and forests. There is from 1985 to 1990 on the federal road network increasing local pressure for many of the and less than 2 percent on the regional network, enterprise roads (of which maybe more than with no growth in 1991. Problems arise with the 100,000 are paved) to be transferred to regional reliability of these data since the traffic count road authorities since they are more public than system has not been carried out in a systematic private roads. However, the regional authorities way in the past. However, FHD is in the process are reluctant to accept the responsibility for these of setting up a more reliable system. roads since many do not meet public road design Reduced funding for road maintenance and standards, most are in poor condition, and there rehabilitation over the last few years and the poor might not be additional funding for their quality of road works has caused deterioration in maintenance. Russia's road network and a growing backlog of In terms of population, paved road density is road rehabilitation. For example, about 38 percent about 1,700 kilometers per million people of the federal road network is poor condition and (km/mn), typical of mid-income countries. The requires rehabilitation or reconstruction; another level increases to 4,700 km/mn if non-public 25 percent is in fair condition and requires thick access roads are included in the network. This is overlays.' Many of the roads classified as "good" still considerably below the average for most EC also require overlays because of their high countries - Austria, Belgium, France, Germany, roughness levels. The total cost of restoring these 107 Chapter 6 federal roads to good condition could amount to Unfortunately, the design standard to which US$4.5 billion at international prices. Little many of Russia's paved roads were built may not information is available for the regional and rural be able to handle the increase in road traffic that road network, but the condition of these roads is is likely to occur with the emergence of a market- thought to be at least as poor and probably worse. based economy. About 35 percent of federal roads If roads requiring overlays are not strengthened and a large part of the regional road network was soon, there is a high risk of complete pavement designed only for 6.5 ton axle loads rather than failure, which would increase restoration costs by the legal 10 ton axle load. Much of the road two to three times. Estimates of the economic cost network needs strengthening to adequately handle of not taking immediate measures to improve road heavier and longer loads of road transport. and highway conditions on the 1,350 km of Although no axle load surveys have been carried priority roads indicate that the first year of out, FHD estimates that 20 to 30 percent of trucks deferred maintenance could cause US$250 million operating on roads built to 6.5 ton standard are of wear and tear on the vehicle fleet, with these already overloaded, particularly during the harvest costs increasing exponentially over the following period. 7The problem is likely to become much three years. The benefit-to-cost ratio for worse as the number of heavy vehicles increases rehabilitation of the higher trafficked roads is 10 and as private ownership leads to more to I or more. overloading unless enforcement is strengthened. An equally serious situation exists with bridges. The network's numerous railway crossings, FHD estimated in 1992 that more than a third of narrow bridges and main roads routed through the 60,000 bridges on the public road network are rather than around towns and cities also present in poor condition and that older bridges are in bottlenecks that have been largely eliminated in danger of collapsing within the next five years if other industrialized countries. Present road not strengthened. Every year about one percent of construction methods lead to premature pavement bridges collapse, resulting in considerable cracking with the result that well over half the diversion of traffic. On the federal road network, federal road network has high roughness levels about 2 percent of bridges are in emergency measured by the International Roughness Index condition and another 26 percent are in poor (IRI), with consequent high operating costs condition; only 10 percent are classified as being (exhibit 6.2). For example, vehicle operating costs in good condition. on a road that is in poor condition are about one- third higher than on roads in good condition. The poor quality of road works appears to be due to Exhibit 6.1: Russian Federation Road Network (krm) (a) inadequate paving equipment, (b) inadequate Type of Roads Paved Unpaved Total Percent control of paving operations, Public roads and (c) the low quality Federal highways 38,200 500 38,700 2 asphalt mixture and cement. Regional highways 217,100 197,300 414,400 46 Pavement roughness is also Subtotal 255,300 197,800 453,100 50 high because of poor Enterprise roads NA NA 450,000 50 maintenance operations, including inadequate crack Total NA NA 903,000 100 sealing, pothole repair, and application of bituminous surface dressings. The past failure to adequately Source: Rosdornii Highway Institute and COWI-TecnEcon. Roads supervise road rehabilitation and Road Transport Study. Draft, July 1992. and other maintenance works I is a major contributor to the low quality, which then 108 Chapter 6 requires overlays to be applied far more such environmental assessments for road works, frequently than when initial road work is properly but now there should be more competition from done. independent environmental consulting groups. Data on road maintenance through 1992 is unreliable since the reporting system for Highway Investment and Financing maintenance agencies did not require filing separate data for federal and regional roads, and The relative sparsity and low standard of Russia's there was little monitoring of data reported. FHD highways reflects the low priority given by Soviet is trying to rectify this situation by requiring filing planners to strengthen and expand the road separate data on federal road works and network, particularly compared to the large-scale introducing a monitoring system, although lack of development of railways and waterways. sufficient funds may slow down its introduction. Investment decisions were oriented to railway transport because it better fit the structure of the Road Safety. Russia has one of the world's command economy, based as it was on large worst road safety records. Fatality rates are primary industries with heavy requirements for extremely high at 135 deaths per billion vehicle shipping bulk commodities. Moreover, transport kilometers (bvk), about five times higher than in decisions in the past rarely took into account value Western Europe and the United States. Moreover, of service considerations that might have justified the number of accidents is increasing at an development of a modern road system. alarming rate: over the five year period 1986 to Ostensibly, the central government exercised 1991, the number of accidents rose by 43 percent, tight control over investments in roads, which deaths by 82 percent and injuries by 43 percent, were traditionally tied to 20-year road compared to an estimated traffic growth of about development programs based on rolling five year 9 percent. 30,000 persons perished on Russia's traffic forecasts. The projections reflected highways in 1991 alone - twice the number who production plans of the most important enterprises died in Afghanistan.2 Surprisingly, the accident and general traffic growth indices, but did not rate is as high on non-public as public roads, even allow for network considerations or economic though traffic volumes are much lower on the assessments. Before major works were carried non-public roads. According to FHD statistics, 16 out, a more detailed technical and economic percent of accidents are due to poor road analysis was prepared by independent design conditions, but the almost complete absence of institutes, in accordance with official guidelines road markings and signs, and the failure to install based on a variant of standard cost-benefit medians on high speed four lane highways, must methods. The methodology was applied using also be major causes of accidents. MOT has financial prices, disregarding substantial drafted a law on road safety which will give it the distortions between economic and financial prices. statutory responsibility to coordinate activities and In most cases even this limited project evaluation develop a road safety program for the country. was bypassed; construction projects were proposed The draft also proposes that the government set up and executed without going through the central a commission of representatives from ministries planning process, usually by dividing major involved in road safety issues, headed by a deputy projects into numerous smaller projects of 2 to 10 Prime Minister. km subject only to local approval. Contractor organizations practically dictated technical policy Environmental Assessment System. The in the road sector so that little attention was paid government requires an Environmental Impact to alternative solutions. FHD is in the process of Assessment (EIA) be conducted for all highway developing new road project evaluation guidelines, projects and that an Environmental Impact using models such as the World Bank's Highway Statement with similar content and format to Design and Maintenance Model III (HDM-III). Western models be submitted to the Ministry of Ecology and Natural Resources for approval. Investment Priorities. In the past, road Normally, highway design institutes carry out investments have been made with a view to 109 Chapter 6 international road links and some links near major Exhibit 6.2: Federal Road Conditions urban centers, diversion of traffic from rail to (two-lane equivalent) road could rapidly change the situation. For example, if just 10 percent of freight ton Road Conditions Km Percent kilometers shifts from railways to roads, road IRI = 3 to 5 million/kn 15,210 37 freight would nearly double and much of the road cracking < 15 percent network could be seriously jeopardized as a result. The increasing privatization of trucking will also IRI = 3 to 5 5,127 13 result in higher traffic as more high-value goods cracking 2 15 percent are shipped by road. Traffic growth rates will have to be closely monitored, particularly on the cRI =i5 to 7 4,979 12 20 percent of the federal road network where current traffic volumes are approaching the level IRU = 5 to 7 2,525 6 at which upgrading from two to four lanes could cracking 5 30 percent be economically justified. IRI 2 7 13,190 32 Financing Road Expenditures. Historically, funds for construction and maintenance of federal Total 41,031 100 roads and roughly one-third of roads in the Note: IRI = International Roughness Index republics - 102,000 km in total - came from the federal budget and a collection of road user Source: Rosdornii Highway Design and charges, including an enterprise tax. In 1991, 55 Technical Institute. percent of the funding came from the federal budget and 45 percent from road user charges. developing a network of feeder roads to rail heads Funding for the remaining 353,000 km regional and to widening highly-trafficked federal roads. public roads came from regional budgets. One The government also gave priority to the third to one half of funding for agricultural roads development of agricultural roads because of its came from federal ministry budgets, and the concern that the inadequate rural road network remaining non-public roads were financed from was a major deterrent to increased food individual state collective farms or enterprises. production, although many roads that need to be As of October 1991, the government decided to built or improved are on-farm roads normally eliminate all budgetary funding of roads and regarded in Western countries as the farmer's replace it with a road user taxation system. Road responsibility. A "Road Construction in funds were established to fund construction and Agricultural Areas Program" to build 256,000 km maintenance activities for both the federal and of agricultural roads was begun in 1991. Lack of regional public road networks, but the funds did funds meant that very few roads were constructed not become operational until April 1992. The road over the past few years, with none in 1992. funds consist of a variety of road user taxes Considerable emphasis has been placed on the including (a) an 18 percent federal and 7 percent development of agricultural, industrial, and other regional tax on gasoline, diesel fuel, oils, "private" roads, resulting in an increase in the compressed and liquefied gas; (b) an enterprise private road network by nearly 80,000 km from tax (for road use) of 0.4 percent of gross revenues 1983 to 1990 (nearly 2 percent a year). Over the for all enterprises offering goods and services; past few years the reduction in road funding has (c) an annual registration tax for vehicle owners; particularly affected road construction, with the (d) a 40 percent tax on the production value of kilometerage of roads constructed and vehicles paid by vehicle manufacturers; and (e) reconstructed in 1992 only half of that in 1989. vehicle sales tax of 20 to 40 percent of the retail While there do not appear to be serious price. Nearly all taxes are ad valorem and congestion problems on the federal or regional therefore should be automatically adjusted for road network at present, apart from a few inflation, although the decline in domestic fuel 110 Chapter 6 consumption and output of Russian industry does FHD projects that for 1993 there will be Rb120 not necessarily mean that funding will keep up billion in January 1993 prices available from the with inflation. Regions have been given more federal road fund for federal road works. Another flexibility in 1993 to raise the level of taxes Rb144 billion will be allocated from the fund to earmarked for regional road funds. regional roads, which together with the Rb182 There were substantial problems with the billion to be collected for the regional road funds, collection of taxes for the road funds in 1992 will make Rb326 billion available for regional because most taxes, including the fuel tax, were roads. However, the funding for federal roads for collected at the regional and local level. Many of 1993 still has to be approved by the Supreme the taxes were never collected, in part due to the Soviet which decides each year how much of the inadequacy of the tax collection system, reluctance federal road fund should be allocated as grants for to remit taxes to Moscow, and the poor financial state roads, a form of compensation for roads situation of many enterprises and mounting inter- formerly maintained by FHD but now maintained enterprise indebtedness. After amendments to the by the regions. Naturally, there is considerable road fund legislation at the beginning of 1993, pressure from local interests and the agricultural fuel taxes are now collected at the refinery level, lobby to allocate more funds for regional and resulting in substantially increased revenues in agricultural roads (exhibit 6.4). 1993. All fuel and vehicle excise taxes are Other uncertainties about the funding for federal allocated to the federal road fund, and all vehicle roads include: sales and registration taxes to regional road funds. 0 Problems with tax collection from refineries FHD does not therefore have to rely on local located in autonomous republics claiming more authorities to remit taxes owed, and regional independence from central government and which governments can put more pressure on enterprises withhold taxes due the federal government. located in their region to pay their taxes. * Problems with tax avoidance. Real expenditures on the public road network * Pressure from the energy lobby and other declined by over 40 percent between 1989 and lobby groups to remove or lower the fuel tax. 1992. Priority has been given to road maintenance Given that the 1993 budget has not yet been so funding for overlays, surface treatments and approved and the recent strong lobbying efforts to routine maintenance has not decreased by as much reduce the fuel tax, considerable uncertainties as for road construction and reconstruction. remain about funding levels for federal roads. Consequently, the kilometerage of roads receiving In general, the World Bank's experience with overlays and surface treatment in 1992 was just road funds has been disappointing. Funds have about 75 percent of that in 1989 compared to only often been diverted to other uses under severe 50 percent for road construction and budgetary constraints, and priority has often been reconstruction. The figures for 1992 and 1993 diverted to new construction rather than to more only include regional road works funded from economically justified maintenance. It has also road funds: an estimated Rb4O billion was been the World Bank's experience that road funds allocated from the federal budget for regional are more supportable and sustainable if they are roads, but little is known about the road works tied to the concept of road user charges. Whether undertaken with these funds. Budget allocations or not Russia continues with road funds from were for predominately agricultural regions where taxes earmarked for road construction and the level of taxes collected is low because of the maintenance, it is imperative that the government exemption of collective farms from paying road ensures funds are sufficient to maintain the user taxes. Total expenditure in 1992 was Rbl76 network. At the same time, the government is billion, including Rb142 billion for regional roads. rightly interested in trying to put in place an Expenditures financed by road funds for 1993 are organizational and contracting framework within projected to be slightly less than for 1992, which road maintenance can be achieved although the Supreme Soviet may vote additional efficiently at the least possible cost. To this end, funds for regional roads directly from the federal the government is trying to decentralize budget (exhibit 6.3). responsibility for road maintenance to local 111 Chapter 6 Exhibit 6.3 Public Road Network Expenditures 1989 1990 1991 1992 1993- Billions of rubles Expenditures on public road works:b current 5.539 6.171 10.883 135.118 446.500 constant' 5.539 5.510 4.752 3.142 2.997 Expenditure on federal road works:d current -- - -- 32.800 120.000 constant -- -- -- 0.762 0.805 Expenditure on public road construction & reconstruction: current 3.125 3.624 5.904 61.668 192.000 constant 3.125 3.236 2.578 1.434 1.288 Expenditure on federal road construction & reconstruction:d current -- -- -- 16.200 62.000 constant -- -- -- 0.376 0.416 Expenditure on public road maintenance & repair:' current 2.414 2.546 4.979 73.450 254.500 constant 2.414 2.274 2.174 1.708 1.708 Expenditure on federal road maintenance & repair:d current constant -- -- -- 16.600 58.000 -- -- -- 0.386 0.389 Km Public road construction& reconstruction 12,533 13,019 10,085 6,191 5,800 Federal road construction & reconstruction -- -- -- 460 550 Public road overlays & surface treatment 40,527 38,393 35,733 30,598 29,400 Federal road overlays & surface treatmenta' -- -- -- 4,840 4,700 a. Projected expenditures, January 1, 1993 prices. b. The expenditure figures for 1992 and 1993 are not complete since they do not include funds allocated from the federal budget to the regions, or expenditure on equipment and miscellaneous items. Expenditures refer only to road and bridge works. c. 1989 prices. d. No data available before 1992 on the split between federal and regional roads. e. Includes routine maintenance. Source: Federal Hlighway Department, MOT. 112 Chapter 6 authorities and to privatize and introduce competition among entities Exhibit 6.4: Projected Funding for Public Roads to be Financed engaged in road works. from Road Funds, January 1993 (billion rubles) While dedicated road user and Regional enterprise taxes are meant to cover Federal Road Total in all financial road construction and Source of taxes Road Fund Funds Total Percent maintenance costs, they cover only a Fuel and lubricants tax 189.0 189.0 42 small part of economic costs. Given Enterprise tax 138.4 138.4 31 that ex-refinery product prices represent only one third of Vehicle production tax 61.0 61.0 14 international prices, the subsidy on Vehicle sales tax 22.1 22.1 5 fuel is about three times the total projected road user taxes in 1993. Vehicle registration tax 22.0 22.0 5 Nevertheless, energy prices have Other 14.0 14.0 3 been increasing in real terms, and the Total 264.0 182.5 446.5 100 attainment of international prices for oil and fuel products is part of the Transfer of funds (144.0) 144.0 government's reform program. Total projected funding 120.0 326.5 446.5 100 Consideration of Toll Road Financing. The lack of public funds Source: FHD, March 1993. for major road projects has made private investment in toll roads appear an attractive source of alternative financing long-term financial cost to the government for road authorities. The government has entered compared to alternative sources of funding. into preliminary discussions with foreign companies about private financing of toll roads for two major highways. Legislation is presently Highway Organization In Transition being prepared to allow foreign investment in toll roads, with the proviso that there must be some Before the breakup of the FSU, responsibility for local participation and a non-charging public road construction and maintenance of roads lay with running parallel to the toll road. The latter proviso both a central Ministry of Construction and with will be a deterrent to potential investors since republic road ministries. After a brief transition traffic would be decreased on toll roads. period, when responsibility for the construction and maintenance of all roads was given to the Currently, few if any roads in Russia carry autonomous state entity Rosavtodor, the road sufficient traffic to make any toll road viable. In subsector was reorganized at the beginning of the present economic and political circumstances, 1992. FHD was established within the newly it is highly unlikely that international investors created MOT and given responsibility for would construct and operate toll roads without administering the federal road network and considerable guarantees from the government to management of the road subsector as a whole, obtain a satisfactory return on their investment. including development of a legal framework for Such guarantees frequently prove more costly over roads, design and promulgation of road standards the long-term than if the government had raised and technical policies, and preparation and the capital itself.4 Therefore, the government implementation of the government policy for should ensure that a comprehensive analysis of development of the road network. FHD serves any financing plan for toll roads should be carried primarily an administrative role, with a staff of out by an independent authority, involving a only 150. All maintenance and construction is detailed economic analysis and estimation of the carried out by autonomous enterprises. 113 Chapter 6 Responsibility for carrying out road separated from the executing functions, thereby rehabilitation and maintenance of federal roads is allowing construction and rehabilitation works to divided among (a) 17 uprdors which are be contracted out. This new program was to be autonomous federal highway corridor management completed by the end of 1992 but, by the end of agencies, each with a regional office covering four May 1993 41 avtodors had made the necessary to six oblasts; and (b) 86 regional road reforms and two were in the process of making administrations. Administration of the regional the transition. Local political resistance and road network was decentralized to the regions, difficulties establishing and staffing the new with local road administrations (avtodors) authorities has delayed the process in the reporting to regional governments. remaining 43 avtodors. The policy of the government is still to complete the privatization of Major construction works were undertaken by road construction activities. two large national contractors but these have now Even in those regions where separation of been broken up into separate agencies, many of administration and execution of works has been which have become, or are in the process of carried out, it is mostly business as usual. becoming, joint stock companies. Road Privatized road construction and maintenance construction units also belong to other ministries, companies do the same work as before including military road construction units that privatization with little, if any, competition. have recently been established as a separate Contractors rarely work outside of their local agency, regional industrial organizations, and area, do not enter into competitive bidding for private enterprises. Bridge construction and contracts, and are still very much under the maintenance is carried out mainly by two influence and direction of the regional highway specialized large companies. agencies. The ties between highway administrations and contractors remain close, Decentralizing and Contracting Out Road particularly in the Moscow oblast where the newly Maintenance privatized road construction company, Mosavtodor and Partners, provides technical personnel to the The highway subsector is undergoing fundamental state highway agency to carry out the various restructuring, like most parts of the economy, and government functions of planning, budgeting, the process is still far from complete. Substantial collection and disbursement of funds, assessment progress has been made developing the central of road conditions, issuance of contracts, and policy and management structure of the road supervision of contracts. subsector, although functional and organizational The way in which road construction and issues concerning the newly established FHD still maintenance companies have been privatized have to be resolved. The reorganization of both varies considerably from one region to another. uprdors and avtodors is still in transition and Based on information from a small sample of subject to some uncertainty. The government has contractors, it would appear that many road declared that those agencies engaged on routine construction agencies have become joint stock maintenance, patching operations, and emergency companies with the majority of shares held by the works will not be privatized. This is justified on employees. In some cases, companies have the grounds that it is too early to contract out purchased, or are in the process of purchasing, routine maintenance activities, given the monopoly their construction equipment from regional position of many of the uprdors and regional privatization agencies (for example, Vologda maintenance units and the lack of resources for oblast), while in other cases the regional highway administering and supervising such a system. administration has retained control of the The organization of regional road equipment and leases it to private construction administrations is also proving to be a complex companies (for example, Moscow oblast). The and largely unfinished task. At the beginning of number of companies established varies 1992, the government mandated that all substantially from one region to another. For administrative functions of avtodors should be example, in Vologda, the former avtodor for the 114 Chapter 6 oblast was privatized, and the company retained adequate funding for road rehabilitation and most of the former construction units and all the maintenance. Priority should also be given to maintenance units; only three construction units improving the road monitoring system for both the decided to break away and become separate federal and regional roads to ensure that funds companies. In Moscow oblast, 45 road allocated for specific roads have actually been construction (formerly district) contractors own spent on those roads. Mosavtodor and Partners, which act on behalf of the district contractors. The company allocates all Obtain external financing for road road construction and rehabilitation works in the rehabilitation. The need to preserve the network oblast and provides all materials and other is so critical that the government should consider supplies to the 45 contractors. external financing to implement road rehabilitation FHD is already taking steps to introduce projects. Besides helping reduce the maintenance competition in the subsector by developing its own backlog, such funding would have two major competitive bidding system; the system is being benefits: tested in 1993 and is intended to be used for all 0 Improved road rehabilitation quality by road construction and reconstruction works in using experienced international firms working 1994. A few of the regions also are interested in with Russian contractors. Such improvements developing such a system. The extent to which a would result from higher specifications for road competitive bidding system is adopted at the works, the use of imported paving equipment, regional level will vary considerably, and much closer monitoring of the quality of materials in will depend on the local political climate. Clearly, order to meet higher levels of specification, and the organization of the highway subsector is still supervision of works by consultants. in an early transition phase and it remains to be * The use of competitive bidding procedures seen whether the real objective of the privatization to introduce more competition in the road program - increased competition among construction industry and assist with the contractors - is realized. privatization of the road contracting industry. The World Bank considers such financing to be Near-term Recommendations vital to Russia's economic recovery and is in the processing of working with the government to Preserve the existing road network. The highest prepare such a project. priority in the highway subsector is to prevent further deterioration of the road network and to Improve the quality of road maintenance works. begin clearing the maintenance backlog; for The poor quality of road construction and federal roads this represents more than half the rehabilitation has resulted in high roughness levels road network. Not only is maintenance of the and premature pavement aging. Techniques and network necessary to avoid later and more costly work methods for patching and resurfacing should reconstruction, usually at two to three times the be improved to produce consistently even cost of overlays, it also reduces vehicle operating surfaces. This will require improved supervision costs because of smoother roads.3 of road works, the training of highway engineers and other staff, introduction of equipment for in- Ensure adequate funding for road rehabilitation place recycling of asphalt layers, and improved and maintenance. The present road fund system is equipment for bituminous surface treatment. an effective means of channelling funds to road Given the high cost of imported equipment, it is maintenance if the measures to improve collection unlikely that contractors will be able to replace of taxes prove successful, revenues keep up with locally manufactured paving equipment in the inflation, and funds are not diverted to other uses. short to medium-term. Therefore, immediate steps Decisions about the allocation of resources for should be taken to determine whether existing road construction projects, especially for regional equipment can be modified, or at least new locally roads, should be organized in a manner to manufactured equipment redesigned to lay road minimize political interference and ensure surfaces with minimum roughness levels. 115 Chapter 6 Immediate measures should also be taken to of funds planned for road maintenance and the ensure that locally produced bitumen meets higher funds actually received is essential, otherwise specifications, to improve the quality of assumptions upon which maintenance strategies bituminous surface treatments. are based will become invalid, leading to the adoption of uneconomic maintenance standards. Give priority to road maintenance rather than road construction. Despite the low road density, Review the administrative structure of the there is little traffic congestion on the road highway subsector. The reorganization of the network. The net economic benefits of upgrading highway subsector in 1992 resulted in a clear highways, although positive in many cases, are demarkation of responsibilities, giving FHD generally nowhere near as high as for responsibility for federal roads and the oblasts maintenance. Therefore, priority should be given responsibility for regional roads. Further review to road rehabilitation, strengthening, and of the duties and activities of federal, regional, maintenance; new construction and upgrading and other highway entities is necessary. Particular projects should be deferred until substantial attention should be given to improvements in progress has been made on clearing the several areas: maintenance backlog. This applies equally to 0 Monitoring works funded from the federal regional as well as federal roads. Therefore, road fund, and establishing an effective auditing emphasis should be put on rehabilitation for system for the Fund. regional roads funded by the federal road fund * Improving the administration of regional rather than new construction or upgrading, unless road agencies and ensuring adequate cost control an economic evaluation clearly shows such works and monitoring systems, and determining whether to be of higher priority. or not this should be under the responsibility of FHD. Develop an economic road maintenance 0 Monitoring the role of the uprdors, both in strategy. At present, annual maintenance work the short term while they retain responsibility for programs are based on engineers' subjective routine maintenance and in the long term if judgements, which often do not take account of routine maintenance is privatized and contracted vehicle operating costs or future availability of out. funds. Consequently, federal, regional and local road authorities need to develop optimal Strengthen the capacity of FHD. FHD is taking maintenance strategies which minimize future a lead role in this transition phase of the highway rehabilitation and maintenance costs as well as subsector by giving priority to (a) road vehicle operating costs, and which consider short rehabilitation and maintenance, (b) improvement and long-term budget constraints. In view of the of road construction and maintenance standards, high economic benefits to be gained from (c) introduction of competitive bidding for road developing optimal maintenance strategies, construction and road rehabilitation works, (d) priority should be given to collecting road improved monitoring and supervision of road condition and other data and developing a works, and (e) development of a road planning highway management system based on road system. Other possible roles for FHD include conditions. FHD intends to develop such a system setting and enforcing road design standards, over the next two years. In the meantime it needs disseminating highway research and technological to concentrate on preparing a short-term developments, and training highway personnel, maintenance strategy in case funding for road especially for managerial and supervisory maintenance is severely reduced. The development positions. To carry out these tasks and to help the of such a strategy will also assist FHD in making regional road administrations develop planning, a good case for road maintenance funding by bidding and other systems will require additional demonstrating the impact on road condition and staff and resources. FHD is currently funded from the cost of vehicle operating and future the federal budget so obtaining approval for reconstruction. Consistency between the amount additional funds is difficult. Alternatively, the 116 Chapter 6 possibility of funding FHD from the Federal Road * Breaking up monopolies that control access Fund should be examined, especially since the to or supply of such essential goods as bitumen, administrative expenditures required only would cement, fuel, and construction materials. involve less than one percent of annual revenues. * Making local supplies of essential goods and services available to all contractors on an equal Determine the role of avtodors. Government basis, until the monopoly position of suppliers is policy to separate the highway administrative broken. functions of the avtodors from the executing functions has met with considerable resistance at Introduce competitive bidding for road works. the regional level. However, the government The development of a truly competitive should continue to pursue such a policy as a first construction industry will require the introduction step to establishing autonomous road maintenance of a competitive bidding system for federal and units to eventually establishing competition among regional road works. Because Russia does not maintenance contractors, either as publicly owned have the legal, administrative, and traditional or privatized entities. Such measures are essential infrastructure of market-oriented economies, to improve the quality and efficiency of road introducing a competitive system with complex construction and maintenance. laws, regulations, and administrative procedures will necessarily take time. Assistance with Establish a competitive road contracting developing such a system will be provided under industry. The government policy of privatizing all the proposed Highway Rehabilitation and entities engaged in road construction rehabilitation Maintenance Project (HRMP) to be financed by and periodic maintenance is proceeding slowly, the World Bank. and some regions are resisting. Nevertheless, the government should remain firm on its Introduce a contract management and privatization policy, because the present force supervision system. Contract management and account system does not encourage competition or supervision of road construction and maintenance accountability nor provide incentives for good has been very weak in the past, and both functions performance. There is a danger, however, that were undertaken by the contractor. Supervision many construction units will be replaced by quasi- was mostly visual and involved few measurements commercial enterprises partially owned or and tests. Therefore, at both the federal and controlled by national and regional highway regional level, an adequate contract management entities. At present, many of these enterprises do and supervisory system needs to be established not have to compete for road contracts, have which will require training of FHD and regional limited access to financial resources, and have staff and improved laboratory facilities. very little managerial freedom. If the government truly wishes to separate client Establish a traffic count system. The and contractor, no government transport agency development of a sound planning system requires should have ownership in road construction reliable data on traffic volumes. Such data will be enterprises. Even if the government ownership is particularly important to identify those roads retained, force account units should be where traffic growth increases significantly as reorganized into autonomous road contractors with more traffic is diverted from rail to road. FHD is their own equipment fleets, who are held in the process of establishing a traffic count accountable and have to compete among system for the federal road network, and such themselves and with the private sector for road efforts should be duplicated at the regional level. contracts. The development of a competitive construction industry will also require a number of Medium-tenn Recommendations other problems to be addressed: * Familiarizing construction enterprises with Improve highway subsector planning and such commercial practices as accounting and cost evaluation of projects. In the past, methodologies control systems, and contracting practices. used in highway planning did not allow for any 117 Chapter 6 network considerations or economic assessment. emphasis should be put on rationalization and Therefore, network planning models should be improvement of geometric standards and adapted to Russian conditions. Guidelines for development of guidelines allowing cost flexibility highway planning and the economic evaluation of for designs based on local requirements and individual road projects should be prepared, with conditions. emphasis on the introduction of the concept of economic prices in project appraisal and improved Monitor axle loads on roads built to six ton traffic forecasting. Guidelines should be applied at standards. Axle loads should be monitored to all levels for planning federal, regional, local and determine if roads presently designed for six tons private roads. FHD is in the process of developing are carrying significant numbers of 10-ton axle such guidelines and will be applying them to plan load trucks. If so, the most critical road sections for the federal road network. will require strengthening to prevent widespread failure. This work should only take place after Design and implement a bridge rehabilitation detailed analysis of optimal timing has been program. An adequate bridge inspection system is carried out. in place for the federal and regional road network, The government needs to find ways of meeting but insufficient resources are allocated to the increased funding requirements to clear the reconstruction of bridges in imminent danger of backlog of road maintenance and to increase road collapse. Given the under design and poor capacity once the economy recovers and condition of many bridges on the road network, congestion becomes more of a problem. Economic including pavements, a comprehensive multi-year efficiency criteria should be taken into bridge rehabilitation program should be developed consideration in structuring road user charges, so based on economic evaluation. The proposed that users carry the cost that they impose on the HRMP will include assistance for such a program. network. Road user charges based on the Priority should be given to (a) reconstruction of economic principle of short-run marginal costs bridges in dangerous condition on critical main include only (a) pavement damage costs from roads; (b) bridges with traffic restrictions; and (c) vehicle use, mostly trucks and buses, which may narrow bridges with long traffic delays - although be only half the costs in wet freezing climates, (b) there are few of these, better traffic signalling the costs such damage imposes on other vehicles, could alleviate the problem. (c) congestion costs, which are not yet significant, and (d) environmental and accident costs. Review the classification and maintenance of Most countries, including Russia, adopt the non-public roads. More than half of the road principle that road user charges should be network lies outside the responsibility of public designed to cover most road rehabilitation and road agencies and is poorly maintained. Very little new construction in addition to road maintenance maintenance of enterprise and other rural roads as well as to contribute to general revenues. Any has been or is now being carried out, causing the road user charge study, therefore, must carefully loss of several thousand kilometers of roads. evaluate the effects of cost recovery on demand Because many enterprise roads serve as public for road use. It is essential that the development roads, a plan for maintaining them and the of a road financing system is carried out by MOT remaining 700,000 km of other mostly rural roads or such other staff as in road design institutes, as should be drawn up. The World Bank's proposed well as by Ministries of Finance and Economy. HRMP will study this problem with a view to This ensures greater understanding of the recommending institutional and financing objectives and process of such a study and a arrangements. policy dialogue within the government. Assistance for MOT to develop the financing systems is Review and revise road design standards. Road included in the World Bank's proposed HRMP. design standards have not been based on any considerations of cost-effectiveness and therefore Enhance training of highway subsector staff. need to be reviewed and revised. Particular Training staff at all levels of the highway 118 Chapter 6 subsector is required in many key areas, such as and supervising road works. Considerable cost-accounting, procurement of goods and civil uncertainty also surrounds the future availability works, contract management, supervision and of funds for road maintenance, but every effort monitoring of road construction and maintenance should be made to convince the government of the works, "least cost" design and planning, and high priority of road maintenance. modern construction, rehabilitation and Since its size is not known, no estimate can be maintenance techniques. Twinning arrangements made of how long it will take to clear the backlog with western highway agencies are recommended of regional road maintenance. Priority should be at the federal, state, and local level to facilitate given to obtaining this information and embarking on-the-job training in organizational, management, on a regional rehabilitation and maintenance financial, technical and other areas; overseas program. Other priorities are to complete the courses, training programs and familiarization bridge rehabilitation and widening program; study tours are also recommended. FHD and the replace some railway level crossings, and improve regional road administrations need to form some surface condition, signing and marking of other kind of association responsible for disseminating crossings. information and facilitating the sharing of relevant experience. FHD has already signed an agreement Increase road capacity. The trunk road network with FHWA of the United States to enter into needs improvements in terms of quality and such a twinning arrangement. extension to meet the expected growth in traffic once there is more economic stability and a free Design and implement a road safety program. market. Substantial diversion of traffic from rail Russia has a very poor road safety record, and the to road is expected over the next ten years, number of accidents has increased at an alarming resulting in congestion on major highway routes. rate since the breakup of the FSU. The Road Therefore, road agencies should closely monitor Safety Commission that the government is traffic levels and develop models to predict major establishing is a good first step to developing of a bottlenecks on the network. Sufficient preparation road safety program. The secretariat for the time for feasibility studies and detailed commission will require a director who should be engineering for road projects will prevent costly appointed as soon as possible. A large training delays in project implementation. Other important program will be required for all personnel areas to study are the need for urban by-passes, involved in road safety work at both the federal upgrading unpaved local roads, and the extent to and regional level. Priority should be given to which rural roads are a bottleneck to development road marking and signing, installing road barriers of agriculture. and median separators, as well as to a program to improve "black spots". Develop axle load regulations. At present, there is no system for monitoring or controlling axle Long-term Recommendations loads. To carry out economic design of roads, it is essential to systematically monitor axle loads on Clearfederal road maintenance backlog. Clearing different parts of the network. An axle control the backlog of rehabilitation and maintenance on system is necessary to prevent overloading - federal roads within ten years would involve the currently estimated at 8 percent - especially if overlaying, extensive rehabilitation, and there is significant diversion of traffic from rail to reconstruction of up to 4,000 km of roads a year. road. An axle load monitoring system requires Additional resources are required to carry out expensive equipment, the use of which has not such a program and these resources must be used always proved effective in enforcing load limits more efficiently than in the past, particularly to because of the many ways in which the system ensure longevity of rehabilitation works by can be by-passed. Therefore, the government is improving quality. Priority should be given to more likely to adopt the low tech alternative of improving road drainage, the quality of materials spot inspections to weigh loads, using typical and paving equipment, reducing road roughness, specific weights for different types of load. 119 Chapter 6 Contract out routine maintenance activities. direct labor, provided contracts are properly MOT policy is to retain the government control of administered and supervised. routine maintenance activities, while ensuring separation of administrative functions from executing functions. Such a policy may be most Notes practical over the short to medium term, given that many of the maintenance contractors who 1. Rosdornii Highway Design Institute, 1992. have been privatized are effectively in a monopoly position. Road agencies would be advised to first 2. L. Kizilova, "Show Me Your Roads ....," develop a competitive market for such works as Gudok, 31 January 1992, p 2. Translated in road construction and rehabilitation before Central Eurasia (FBIS-USR-92-023) under embarking on privatizing routine maintenance, "Highway System, Problems Examined," p 99. which requires more intense supervision. Over the long run, many activities now being 3. For more discussion of the real costs of toll done by force account would be more effectively roads see: P. Blackshaw, J. Flora and R. carried out by small private contractors: they Scurfield. Motorways by BOT: Political Dogma include many winter maintenance activities, or Economic Rationality? Paper to PTRC Annual surface treatments, and some, if not all, routine Meeting. September 1992. maintenance tasks - except possibly in remote areas where there might be little competition. 4. Details of the economic benefits of road Such a system should be based on the results of maintenance for countries with similar problems pilot projects to test alternative approaches. can be found in IBRD ECA and MENA Technical According to recent studies, contract maintenance Department: RoadRehabilitationand Maintenance should be more cost effective than maintenance by in Central and East Europe. September 1992. 120 7 Waterborne Transport Overview Hamburg. The Federation's containerized seatrade in 1992 was no more than the container traffic The waterborne transport system of the Russian through Indonesia's Tanjung Priok port. 7hese Federation encompasses three segments: figures reflect the fact that most of the Russian international ocean, national cabotage, and river economy's production was traded internally transport. Activity in each of these is further among the FSU. Its international trade was divided into geographic areas of activity based on largely undeveloped and with the exception of water basins. Each segment is composed of fleets, petroleum, coal, wood exports, and grain imports, supporting industries, and physical infrastructure limited primarily to Eastern Europe, Cuba, and such as ports, rivers, and canals. In 1992, the other allies in Asia and Africa. Thus by three segments' collective share of the total freight international standards Russia's seatrade is tonnage transported by Russian common carrier minuscule and it is declining. transport was 2.6 percent: ocean transport carried In keeping with socialist goals and philosophy, 83 million tons; cabotage, 29.6 million tons; and Soviet international trade was managed centrally, river transport, 374 million tons, of which nearly and all foreign earnings and expenditures were 17 million tons were international trade. subject to the strict control of the Ministries of Excluding oil and gas trades through pipelines, Economy and Finance. To control shipping about 70 percent of Russia's international cargo centrally, most trade was handled by the transactions were transported by ocean and river- monopolistic freight forwarding agency, sea transport.' Soyuzvneshtrans (SVT) in ways that maximized Although such a large percentage of Russia's the use of Soviet ships. Sovmortrans and several non-petroleum trade cargo is transported by sea, other freight forwarding agencies created in the the annual volumes of seatrade and port 1980s also participated in this effort. Domestic throughput represented only about 4 percent of exporters had to arrange international cargo global seatrade in 1992. Total Russian transactions on a Cost-Insurance-Freight (CIF) international seatrade was 165 million tons in basis; importers were to execute freight contracts 1992, of which 83 million tons, or about half, was on Free-On-Board (FOB) terms. Such practices carried on Russian ships. Imports represented 30 were designed to ensure that Soviet transport percent of the total and exports 70 percent, of carried virtually all Soviet trade and would be which 57 percent were liquid, almost exclusively contracted for sea transport, thereby maximizing oil. To put Russia's maritime trade in perspective, control of goods and international contacts and the total freight throughput in all of the minimizing foreign exchange outlays for ocean Federation's seaports in 1992 was equivalent to freight. An exception applied to countries with the cargo handled by Shanghai, China, or in two which the FSU had preferential trade agreements of Western Europe's principal ports, Antwerp and providing for a 50-50 split for carriers from each 121 Chapter 7 trading partner. Compensation for cargo transport Russia's existing fleet capacity is roughly 84 was negotiated, mostly in non-convertible million tons per year (based on an average 6.2 currencies. Commodity bartering often replaced tons per dwt a year), consisting mostly of general cash flows as a form of freight payment. cargo ships: 793 ships represent 28 percent of the total fleet's dwt. Their size and configuration is Merchant Marine Fleet. As a result, the FSU not well-suited to international competition, partly Merchant Marine Fleet was big but not because they were geared to the pick-up and particularly efficient. Even after the breakup, delivery trade among Russia's small ports, as well Russia's fleet remains large (exhibit 7.1); the as to international trade to and from specific Federation has 1,433 ships with a total deadweight ports. tonnage (dwt) of 13.6 million. Unlike Russian The fleet's carrying capacity represents about practice, shipowners in many countries have "out- half of Russia's annual trade, equivalent to the flagged" a number of their vessels to other percentage of Russia's maritime trade carried by countries, making the total tonnage of beneficial Russian vessels in 1992. A number of countries ownership larger than national flag fleets would are more than satisfied if their trading figures suggest (exhibit 7.2). For example, the total approximate what has been called the 40 percent tonnage under beneficial ownership in Greece is to 40 percent to 20 percent standard promulgated now over 100 million dwt; in Japan it is 83 by the UNCTAD. The government seems to want million dwt; in the United States 62 million dwt; as much Russian trade as possible carried in and in Norway 57 million dwt. The ratio of Russian ships. Given the glut of ships worldwide, Russia's dwt to its total trade tonnage is high. the fact that only half of Russian cargo is being Exhibit 7.1 Status of the Former Soviet Merchant Fleet (July 1, 1992) Russian Federation Other CIS Republics Baltic States Category dwt ('000) # of Ships dwt ('000) # of Ships dwt ('000) N of Ships Ships of 300 grt/gt and Over Oil tankers 3,908.9 (239) 1,165.7 (153) : 904.3 (47) Chemical tankers 32.8 (9) 20.8 (7) - - Liquid gas tankers - - 139.4 (3) - - Bulk carriers 1,505.0 (74) 2,490.1 (75) 419.9 (17) OBO carriers 1,611.6 (18). 120.1 (42) Container vessels 484.6 (40) 145.8 (20) 18.3 (2) General cargo ships 3,923.9 (793) 3,065.2 (420) 416.7 (104). Reefer vessels 1,055.1 (190) 350.9 (68) 332.7 (51) RoRo ships 1,072.5. (70) 385.1 (37) .:128.8 (24):i... Total 13,594.4 (1,433) 7,883.1 (825) 2,220.7 (245) Share in dwt 57.4 % 33.3 % 9.3 % Source: Institute of Shipping Economics and Logistics, 1992. Statislical Yearbook, Bremen. 122 Chapter 7 modest, in 1992 representing only 4.04 percent of total tkm transported in the country and 1.9 Exhibit 7.2 Merchant Fleets of the World percent of tonnage (exhibit 1.2). River transport's share of freight transport is far greater in other Nation Ships 000 dwt parts of the world with similar resources. For China 1,281 19,611 example, tkm river transport in the United States was 13 percent and in 1992 more than 600 million Greece 914 36,537 tons of cargo were transported by river in the Japan 1,007 36,237 United States, as well as in a European region that includes the Benelux countries, France, and Liberia 1,409 88,275 Germany. Excluding local traffic, Russia's 11 Panama 3,189 70,537 principal river ports each handled about 2.2 million tons of longer distance general cargo in United States 407 20,439 1992, less than 20 percent of the average trade Russia 1,433 13,600 volumes of similar ports in Western Europe. River transport potential in Russia is limited by a number of factors: Source: U.S. Department of Transportation. * The rivers tend to flow north-south while most transport requirements are east-west. 3 River traffic is seasonal and limited by carried on Russian ships is not necessarily bad, weather conditions. however, since the service and costs provided by * Rail services and prices are more non-Russian carriers may be relatively competitive than river transport, whose tariffs advantageous. Foreign lines are essentially favored large volume cargos such as sand and replacing capacity lost to other republics. gravel. e River transport is a subsidiary business of Monopolistic Shipping Companies. The each river port. Besides owning its own vessels merchant marine fleet was designed to meet the that transport general cargo, each port is cargo needs of each port rather than the overall responsible for dredging, organizing storage and needs of Russia's international trade. Each transportation, and providing cargo handling shipping company was assigned a specific set of services. ports to serve, with little overlapping or competition because, until recently, ports were For reasons of price and performance, more and owned by the shipping lines they served. Russia's more long-haul commodities typical of river major seaports were subordinated to the regionally transport elsewhere have been diverted to the based national carriers. Smaller ports were railway. As a consequence, most river transport in subdivisions of the carriers and were, as such, Russia today consists of sand and gravel fully integrated into a carrier's organization. The aggregates dredged from rivers and used locally in central authorities decided the role a port had to construction. The average length of haul for these play, and directed predetermined types of ships materials is less than 200 km. and cargo to each port. As a result, most ports Excluding sand and gravel, river transport is became highly specialized, and each ship was responsible for only eight percent of total responsible for carrying most of its cargo for the transport in tkm. Nonetheless, Russia's river fleet home port. There was little scope for is far too large for the volumes of freight diversification, and questions of competitive available to it. The 9,000 river vessels have an strategy and service improvement hardly ever estimated annual carrying capacity of 850 billion arose. tkm at 50 percent utilization, yet in 1991 the total tkm transported by the river fleet in Russia was River Transport. The annual volume of cargo only 200 billion tkm. By this measure, the number transported on Russia's river and canal systems is of vessels is at least four times more than 123 Chapter 7 currently needed. Given the substantial surplus ofriver transport Exhibit 7.3 Cargo Turnover in Russian Seaports vessels, investments proposed to (millions of tons) replace or expand capacity in this sector will be difficult to justify and 1989 Percent 1990 Percent 1991 Percent should be considered only against Drycargo ll1 2 65 101.7 62: 90.7 :7 reductions in operating costs. General cargo 35.7 21 34.8 21 31.9 25 Even if prices were changed and Bulk cargo 47.4 28 :43.8 27 35.9 28 river transport made more Grain 16.7 10 15.8 10 17.4 14 competitive, the commercial river L o 8 fleet in Russia is ill-suited to the sort of low-cost river transport Total 169.9 163.6 128.5 provided elsewhere in the world. . . . ~~~~~~~~~Source: Soyuzmrnmiiproeht. This is because so many of Russia's river fleet are self-propelled vessels, rather than the pusher and barge system used elsewhere. In Europe and the United trade flows through Russian ports. In 1990, 63 States, the pusher operates almost continuously, percent or 164 million tons went through Russian picking up and dropping off barges. Self-propelled ports. In 1991, virtually all Russian cargo was vessels must wait while cargo is loaded and channelled through Russian ports (exhibit 7.3). unloaded and work less than half of total navigation time. According to the EBRD-funded Imbalance of International Seatrade. Russian report on Russia's Waterborne Transport Sector, maritime exports are substantially greater than "currently the self-propelled vessels comprise imports. Exports totalled 145 million tons in 1990 about 35 percent of the total deadweight tonnage but dropped to 115 million tons in 1992. Imports [dwt] of the fleet, assume 77 percent of the fleet totalled only 37.22 million tons in 1990 but costs and carr[y] 23 percent of the traffic volumes increased to 49.26 million tons in 1992, of which and 60 percent of the ton/km."2 The report cites grain represented half, or 25 million tons. 1991 the River Transport Research Institute in Moscow figures were drastically below these totals, as having calculated that the costs of the self- reflecting the disintegration of CMEA trade propelled fleet are 3 to 6 times higher than the relations and the political upheavals preceding the pusher/barge system (exhibit 7.3). final dissolution of the FSU (exhibit 7.4). Past and Future Levels of Waterborne Trade Current Commodity Mix of Russian Imports and Exports. Some decline in post-CMEA trade flows Russia's seatrade volumes historically have been was to be expected, since trade within the USSR relatively small and trade flows generally and CMEA was not based on economic principles unbalanced. Moreover, annual cargo volumes in of comparative cost and location advantage, each waterborne transport segment have declined explaining in part the inordinate degree of significantly in the last few years; 1991 ports transport intensity within the USSR. Recent levels were 25 percent below peak levels of 1988, studies indicate that the FSU and former CMEA cabotage trade down by 14 percent in 1990 from states can be expected to trade less with each 1987 peak levels, and inland waterway traffic other and more with other countries, notably those down by 12 percent in 1991 from 1989 peak in Western Europe, to import more machinery, levels. Total Russian seatrade was 260 million and to export more raw materials and metal tons in 1990, 129 million tons in 1991, and 165 products.' Nonetheless, preliminary figures for million tons in 1992. The increase in 1992 reflects 1992 and the first part of January 1993 indicate the partial recovery of trade with former CMEA that, as before, East European and Baltic countries partners, as well as Russian efforts to channel are among the most active buyers of Russian 124 Chapter 7 replacement trade will also be Exhibit 7.4 Russian Seatrade Volumes by Type of slow to develop. Cargo (millions of tons) In 1991, 13.8 percent of all Russian international commercial Percent of seatrade was with socialist Total Russian Percent Which International of Which Liquids' countries, of which 67.9 percent Year Seatrade Impons Grain Expons was with CMEA member states. 1990 182.6 37.22 37.4 145.37 62.9 Bulgaria was Russia's primary CMEA export target, primarily 1991 67.2 17.27 66.5 49.95 56.7 for petroleum products. Cuba was 1992 164.8 49.26 50.8 115.51 57.0 the primary source of CMEA imports, largely sugar. * For 1991, petroleum = 100 percent of liquid exports. Corcialarae with , . ~~~~~~~~~~~~~~~~~~Commercial seatrade with Source: Russian Ministry of Transport, Department of Maritime Transport. Freight developing countries accounted Throughput of Sea Pors and Inter-Pori Freight Exchange (Moscow: Department of for 10.7 percent of the total, Maritime Transport Main Computer Center, 1992), and Ministry of Transport data, India being the primary importer provided to World Bank mission, Moscow, November 1992. of Russian sea shipments, with petroleum and paper. Argentina was the primary source of products; in terms of the total number of export imports, a relatively small amount of grain and contracts, Bulgaria, Latvia, and Poland were metals. Russia's top customers. The type of commodities Trade with developed and market-oriented exported to these countries remained unchanged - countries accounted for 75.6 percent of overall simple manufactured goods, foodstuffs, and commercial seatrade. Leading purchasers of products of the machine-building and chemical Russian goods were Japan which imported coal industries.4 and wood, and Italy which imported petroleum, coal, and wood. Canada was the leading exporter Level and Balance of Future International Trade of goods to Russia, shipping mainly grain, ore, Flows. Future overall developments in the and other goods. maritime sector are expected largely to follow When the economy improves, new trading broader economic development trends. Trade partners are likely to emerge. Long-term forecasts growth projections for the Russian Federation call for significant growth in trade to Pacific Rim suggest that declining trends can be expected to countries. Japan and other Asian countries are persist until the mid-1990s. Thereafter, traffic is interested in developing or expanding trade with expected to increase slowly as the economy Russia for timber, oil and other natural resources. recovers. The government forecasts annual cargo Trade in Russian manufactured goods to Europe growth beginning in 1995 of 4.5 percent for ocean may gradually increase, but the greater growth is transport, 3.5 percent for cabotage and river-sea likely to be in the export of raw materials and the transport. The annual incidence of river transport increase in imports of finished goods. As borders cargo, on the other hand, is expected to decline to to Europe through Ukraine and Belarus open, it is about 300 million tons in the next few years, and likely that trade previously brought into Russia on not to increase until after the turn of the century. Russian-owned ships may instead be brought by At these growth rates, it is likely to take about truck and rail, particularly high-value items. 12 years for the annual cargo volumes in Russia's Russian forecasts project a continued decrease in waterborne transport system to reach levels which movement of oil and oil products, wood in rafts, were characteristic of the mid-1980s, so external and construction materials by internal waterway, trade is likely to remain depressed for years. but anticipate increases in river-seatrade and wood Much trade with Cuba, Vietnam and Eastern carried on river craft. Europe has been lost. The projection of a slow In an analysis of trade in 1992 and early recovery for the economy as a whole means that January 1993, certain modal shifts had already 125 Chapter 7 specific part of the all-Union Exhibit 7.5 Transportation Used b Russian Firnis for Deliveries trade. The break-up has left the Exhibit 7.5 Transportation Used by Russian Finns for Deliveries republics with somewhat 60 x disjointed water transport and 40 - infrastructure assets. 40- sa - Ports. The breakup reduced et e E - Russia's port capacity by 53 ea - ,& X - percent as only 7 of 18 major Its _ - - -ports handling over 6 million tons of cargo annually remain in Dy cu ~y .11 B air By U. Dy I".r ther Russian territory. Perhaps more important, Russia lost specific _Import E o Export facilities as a consequence of the Souro Xorot Kru.Iyaa. nd USSR's penchant for Alkhi,. E. "Ep-,t-r. T.r- .n . phill Climb~ Commerant 19 ZsnuarJ jD95)specialization. For example, in the Baltic area, the New Tallinn (Novotallinn) Port in Estonia, become apparent. During this period nearly half which became operational only in 1986, was the of all Russia's foreign trade was carried by road FSU's primary grain port and site of the main transport, because of its higher reliability, lower grain storage facilities, with a 370,000 ton storage costs relative to other modes, and the large capacity. Riga, Latvia, was one of only two ports number of firms offering international in the FSU with modern container facilities. transportation service (exhibit 7.5). Sea-going Ventspils, Latvia, was the FSU's major oil export ships were not widely used, despite low cost, terminal. In the Black Sea, where most of the essentially because ties with countries outside ports now belong to Ukraine, Odessa served as Europe and the Middle East were not extensive.' the major southern grain facility. The share of Russian cargo handled by these ports in 1991 was Future Containerized Freight Transport large, with about 25 percent of Russian cargo Demands. Of the 403 million tons of cargo passing through ports in the Baltic basin and 40 through CIS ports in 1990, only 9.4 percent, or percent through ports in the Black and Azov Sea 38 million tons, moved by container or RoRo basin. According to official statistics for 1990, 63 vessel. Only 8 million tons, or less than 2 percent, percent of Russian seatrade was channeled through moved in containers. Only two ports - Ilichevsk what are now Russian ports; most of the balance and Vostochniy - handle more than one million was handled at ports in the Baltic republics and tons a year in containers. Because of the Ukraine (exhibit 7.6). These ports have begun disintegration of the unified rail network, the poor charging foreign currency to Russian customers. quality of rail service, and the low state of Russia now has seven major ports, only two of development of the road network and the intercity which are multi-functional national ports, St. trucking industry, significant increases in Petersburg on the Baltic Sea and Novorossijsk on intermodal movements of containerized freight are the Black Sea. These and six smaller ports not expected in the near to medium term. handled more than 70 percent of all Russian maritime trade tonnage in 1991. Exports from Effect of the FSU Breakup Russia's busiest port, Novorossijsk, were shipped mostly to Italy, India, and Bulgaria (crude oil) in Waterborne transport services and infrastructure 1991. Primary imports routed through have been substantially influenced by the effects Novorossijsk came from Canada and the United of the breakup of the FSU. The old system was States (grain). In addition to these major ports, organized under the premise of specialization with there are a number of smaller ports along Russian each carrier and port developed to manage a coasts, particularly along the Arctic Ocean and 126 Chapter 7 Exhibit 7.6 Cargo Turnover in FSU Ports, 1990 and 1991 (million tons) Representative Total Cargo Vessel Total Russian Russian Federation Ports 1990 Liquid Dry Bulk Container Calls 1990 Cargo 1991 Novorossijak 41.4 34.2 7.2 7.18 0.02 1,176 23.6 Nakhodka 13.3 5.6 7.7 7.70 -- 1,901 11.3 Vostochniy 11.0 - 11.0 9.10 1,90 1,218 8.6 Vannino 10.0 7.8 Tuspse 13.4 10.8 2.6 2.60 -- 851 7.8 Vladivostok 5.0 6.8 Khohlrk 6.7 - 6.7 6.70 -- 4,721 6.2 St Petersburg 9.9 0.1 9.8 8.90 0.90 1,776 4.9 Murmansk 7.3 - 7.3 7.00 0.30 578 4.6 Archongelsk 5.4 0.6 4.8 4.50 0.30 863 4.0 Kaliningrad 2.4 Astrakhan 2.2 Korsakov 2.0 0.5 1.5 1.50 -- 520 2.0 Total 217.2' 50.3 60.0 55.20 3.50 92.2 Key ports in other FSU republics Ventspils 30.1 25.7 4.4 4.4 -- 2,136 0.20 Odes 37.9 18.7 19.2 18.8 0.4 1,595 1.30 Klaipeda 14.4 7.6 6.8 6.8 .- 2,308 0.12 Ilyichevsk 12.9 1.0 11.9 10.9 1.0 2,097 0.08 Mariupol 10.0 0.1 9.9 9.6 0.3 1,644 0.06 Baku 7.8 4.7 3.1 3.1 -- 3,285 Yuzhny 10.2 - 10.2 10.0 *- 356 0.08 Reni 7.7 0.3 7.4 7.4 -- 863 Krasnovodsk 8.5 3.6 4.9 4.9 -- 1,457 lznail 7.9 0.2 7.7 7.5 0.2 1,632 Rigs 6.0 0.1 5.9 5.3 0.6 1,524 1.00 Batumi 5.1 4.6 0.5 0.5 -- 461 Novotallinn 3.8 -- 3.8 3.8 -- 404 0.70 Kherson 4.5 0.4 4.1 4.1 500 0.09 Pori 3.8 -- 3.8 3.8 -- 622 Tallinn 3.5 -- 3.5 3.3 0.2 1,433 0.07 Total 170.9 65.1 105.8 70.5 2.9 Total for about 40 smaller ports in the entire FSU 85.0 12.8 72.2 42.6 1.7 Toral all FSUports 403.4 128.2 238.0 151.6 8.1 129.00 a. Total Russian port throughput for 1990. Sources: 1991 data: Freight Throughput of Sea Ports and Inter-Pon Freight Exchanges (Moscow: MOT, Department of Russian Sea Transport, 1992. 1990 data: Ministry of Transport data, provided to World Bank mission. Moscow, November 1992; also: EBPRD Waterborne Transport Sector Survey. Draft Final Report, p 4-2. Vessel Calls: Morskoy Flot Journal. Quarterly Supplement Soviet Shripping No. 3.91. Moscow. 127 Chapter 7 Pacific Rim, where seatrade is often the only * Establishing most significant ports and means of transportation to industrial and timber shipyards as independent business entities sites and to small communities. Altogether, the responsible directly to the Department of Marine Russian Federation's national ocean and cabotage Transport for their business activities. transport infrastructure system includes 41 ports * Establishing an independent Commercial of significant size and an additional 30 or so Seaports Association to represent all large Russian smaller maritime ports. ports. 0 Placing the state educational, training, and The Maritime Sector. In terms of shipping research institutions directly under the capacity, the Russian Federation inherited 57.4 management of the Department, although some percent of the combined Soviet merchant fleet trade institutions have been left under the with a fair share of all specialized tonnage (exhibit supervision of the shipping companies. 7.1). Of the FSU's 17 ocean carriers, nine have * Retaining a direct management role for become Russian. several key strategic business enterprises that include: (a) Morbank, a bank that provides The former Ministry of Merchant Marine investment capital and credits for the maritime (MINMORFLOT) has been integrated into the new sector; (b) Sovfracht, the agency that carries out Russian MOT as the Department of Marine vessel chartering and brokerage and performs Transport. The Deputy Director of this new agency functions outside Russia. This agency was department supervises five major divisions supplemented by the creation of several other organized to carry out: brokers in the late 1980s; (c) a satellite navigation * Coordination of transport activities. and communications enterprise known as * Economic policy and management. Morsvyazsputnik, now a public-private * Development of regulations. partnership; and (d) Sovbunker, which acts as the * Navigation safety. purchasing agent for foreign technologies under * Management of social policy and resources. the World Bank's First Rehabilitation Loan (Ln. The functional responsibilities of these divisions 3513-RU) and which sells bunker oil and other cover - in some form - all of the functions that fuels; (e) the Soviet Registry of Shipping, an MINMORFLOT performed, but the Department of independent agency through which marine vessel Marine Transport has less direct authority to construction and operating standards are set and finance and control the activities of the maritime monitored. sector and a much smaller amount of financial * Establishing privatization procedures for resources. maritime and inland waterway ports, shipping Within this policy framework, the government lines, and shipyards. has decreed that the old shipping concerns should be broken up and their constituent enterprises River Transport. The effect of the breakup on made independent of their old parent shipping the river transport sector was less disruptive. The concerns and of the financial resources of the bulk of the FSU river transport system remains Department of Marine Transport. To help ensure under Russian ownership. It consists of about that this new independent status is achieved, the 9,000 craft, more than 100,000 km of navigable government has dissolved MORFLOT, which was waterways serviced by 16,000 km of man-made the agency that provided the central administrative canals, 11 key river ports, and hundreds of and commercial management functions for the smaller riverine cargo transfer facilities. Most merchant marine of the USSR. The government river transport in the FSU uses a widespread canal has taken a number of specific steps to implement system that connects the Don, Kama and Volga these policy changes: river systems in Russia. The system has a general * Making most shipping companies north-south orientation and connects ports of the independent business units, and suspending most Baltic, Azov, Black and Caspian Seas. River subsidies and funding from the central budget. transport also plays a significant role in northern 128 Chapter 7 regions of Siberia and the Dnieper river system, making foreign currency payments for port now in the Ukraine. charges and for additional time lost moving in and Before 1991, when Soviet river transport was out of a neighboring country. Russian carriers managed regionally, Russia had the Ministry of now also charter ships to carry trade once handled River Transport, reporting directly to the Council by ships owned by other republics or their own of Ministers. The central government provided lines that have flagged out ships to other technical assistance to the republics and funding countries, paying in foreign currency. The for major capital expenditures. In an resulting payments of an estimated US$1.5 billion organizational and institutional sense, the breakup hard currency equivalent in 1992 are reinforcing of the USSR has affected the river shipping sector the government's determination to break this less than the maritime sector. The former Russian dependency. Ministry of River Transport has been reestablished as the Department of River Transport in the Maritime Reform and Port Classification. As a Russian MOT. During an interim transition first step toward restructuring the maritime and period, Rosrechflot was formed to manage and port sectors, in January 1991, Russia's seaports administer Russia's river transport, but since the were organizationally separated from the national formation of MOT, Rosrechflot's role is to carriers. The shipping lines were corporatized rationalize and promote river transport. and permitted to compete with one another for The breakup has precipitated some important business. All state subsidies were terminated, changes in the government's policy toward the except to those lines serving remote facilities in river shipping industry: the Arctic and the Far East. This measure enabled - Removal of government-prescribed inland MOT to develop a classification scheme for waterway tariffs. rationalizing the port system. * Freeing firms to negotiate contracts for goods and services with other all other businesses. Through this process, Russia's ten largest and * Separating shipping companies from other most diversified ports, which handle most of the enterprises. international seatrade, were designated as being of * Relieving the enterprises of responsibility national importance and classified as Category I for past obligations and debts of their predecessor ports. Another 21 ports considered of regional enterprises. importance, most of which are in the Far East, d Making the enterprises financially were classified as Category II. The government is independent by stopping subsidies. planning to transfer all ports in this category to * Having enterprise heads report directly to regional jurisdiction. Under such arrangement, the MOT and giving them the authority to hire and regional administrations can decide how the fire their own management teams. management and operations of the ports in their * Funding maintenance of waterways and domain should be organized. Finally, ten small locks through user fees administered by ports, most of which are located in the White, independent waterways associations, not through Azov and Caspian Seas, constitute Category III. government subsidies. These small ports are considered to be of narrow * Forming an association of newly- local importance. independent shipping companies to promote the The government intends to give local authorities industry. a free hand in organizing and managing these ports, which might conceivably include decisions Restructuring and Reform to close some facilities. The effective implementation of this excellent policy has broken The Russian government's response to the the monopoly between ports and ocean carriers, changed circumstances has been to launch all-out dramatically reduced the government fiscal efforts to overcome a perceived dependence on liability for maritime operations and has set the what are now foreign ports and shipping assets. stageforan effective program of restructuring and Russian carriers complain about the necessity of privatization of shipping lines and national ports. 129 Chapter 7 Russia 's Poir Sector Arctic and Pacific Oceans, and the seas bordering the country (the Baltic, Azov, Black and Caspian Russia's ten Category I ports, each with an annual Seas). Including cabotage, cargo throughput data throughput of over 4 million tons, carried 76 by basin at Russia's largest ports in 1991 show percent of Russian international seaborne trade in that most cargo flows are in the Black Sea and the 1990, and 66 percent in 1991. Russia has 31 Far East. Russia's two Black Sea ports accounted smaller ports, making a total of 41 seaports with for 24 percent of the total throughput through 248 berthing complexes 41,500 meters in total Russian ports in 1991; the Far East ports on the length and a theoretical throughput capacity of 165 Pacific accounted for 32 percent. Two ports in the million tons (exhibit 7.7). Total Russian trade in Arctic accounted for 6.7 percent and St. 1990 was 260 million tons of which total Petersburg in the Baltic only 3.8 percent. Liquids throughput in Russia ports was 164 million tons or were handled only at the ports of Novorossijsk 63 percent. The Baltic ports handled 47 million and Tuapse, which have traditionally been among tons, of which 33 million were liquid goods, Russia's oil export terminals. Efforts will be made Ukrainian ports handled 42 million tons, of which to channel more exports through these ports 20 million were liquid goods, Finnish ports because of the loss of the oil facilities in Klaipeda, handled 5.5 million tons and ports in the Caucasus Lithuania and Ventspils, Latvia. Novorossijsk is handled 1.5 million tons. Russian throughput now also Russia's main grain port and the dropped to 129 million tons in 1991 but this government wishes to increase its capacity to amount represented virtually all Russian trade, make up for the loss of grain handling ports in including cabotage. In 1992 Russian trade Odessa, Ukraine and Novotallin, Estonia. In the increased to 165 million tons, and most of it was Pacific, most of the trade at Vannino and routed through Russian ports, although precise Vostochniy is with Japan. Vannino contains the figures were not available. rail ferry to Sakhalin. Vostochniy is opposite Statistics for Russia's maritime sector are kept Nakhodka in the Sea of Japan at the Southern on the basis of water basins comprised of the most point of Russia, not far from Vladivostok which until recently was solely a military port. Nakhodka's port is served by a monopoly liner Exhibit 7.7 Tonnage Throughput of Russian service jointly owned by Japan and Russia called Maritime Shipping Basins and Major Ports, the Japan Nakhodka line. Modern container 1991 (milions of tons) facilities are available at St. Petersburg port, Basin Percent of Vostochniy and Nakhodka. Percent of Total Declining port productivity and increasingly Tots Cargo Tota Russianpoticesnl Throughput Cargo Cargo obsolete equipment and facilities have reduced the Black & Azov Seas 24.0 cargo handling productivity of Russia's ports and Novorossijak 23.6 18 increased ship waiting times. Lack of storage Tuapse 7.8 6 space compounds the problem and contributes to Pacific/Far East 32.0 declining handling rates (exhibit 7.8). Russian Nakhodka 11.3 9 ports also suffer from basic design problems. Vostochiy 8.6 7 Capabilities for handling containers are adequate, Vannino 7.8 6 Vladivostok 6.8 5 but long dwell times related to documentation and Kholmsk 6.2 5 an imbalance of empty containers point to a need Arctic 6.7 for an inland container depot. Another limitation, Murmanak 4.6 -- although not a major one, is that 60 percent of Archangelsk 4.0 -- Russian ports are too shallow to accommodate Baltic 3.8 vessels more than 40,000 dwt. Since Russia's St. Petersburg 4.9 4 geographic location makes it likely that it will be served by feeder vessels and smaller container Source: MOT. ships that service the transshipment trade, this is not likely to be a major problem. A number of 130 Chapter 7 factors contribute to the problems in Russian oceangoing vessels, but also for land transport, ports: which is designed to have the railway come along * Port Equipment. More than 31 percent of all side the pier so that ships can be loaded or gantry cranes, including those used for the unloaded directly into rail cars. This practice transshipment of grain and foodstuffs, have been inextricably links port performance with railway active for more than 20 years and have reached performance. Ports continuously complain that the end of their effective service life. More than sufficient rail cars are never available to unload half of the forklift fleet and yard tractors are older the ships. The shortages are worse during harvest than six years. The situation is similar with nearly time, when rail capacity is diverted inland to 65 percent of the imported straddle carriers, agricultural areas. The EBRD Waterborne holding machines, and port tractors.6 Analysis has Transport Survey consulting team looked at three shown that equipment utilization in Russian ports Russian ports: Novorossijsk, Vostochniy, and St. is extremely low by world standards. EBRD- Petersburg. All three ports are at the mercy of the financed consultants estimate that in St. Petersburg railways for cargo traveling to and from the port. the utilization of available handling equipment is This is due in part to the nature of Soviet less than 50 percent; in Novorossijsk utilization of transport policies and also in part to the fact that port cranes is less than 50 percent, and the actual access roads are narrow and in bad condition, and daily handling capacities at Port Vostochniy's roads within the port are in bad condition as well, three terminals are also well below established causing damage to rolling equipment. The capacities. In large measure, low equipment shortage of rail cars for port transshipment of utilization is a reflection of overly conservative cargo has been ascribed not so much to an actual standards of equipment-employee ratios and of shortage of rolling stock (except tankers) but more outmoded cargo handling practices. to poor communications between railway * Land-side Access Infrastructure. Port operators, port operators, and freight accessibility is limited not only for incoming consignors/consignees (see box). 0 Lack of Storage. Storage facilities for a wide mix of commodities are scarce, partly Exhibit 7.8 Cargo Handling Rates at Three Major CIS Ports because of the outmoded practice of off-loading ships directly into Gross Handling Rate (mt/day) rail cars and - excepting for investment in the Far East Basin - to the fat that investment in z2o0 _ storage was for grain and oil, at what are now non-Russian ports: 1500 - , -New Tallinn and Ventspils. More efficient off-loading of ships 1000 - ~~~~~~~~~~~~~would result from better storage X X , X | facilities and by ending direct rail 600 _ access to the quay area. * Seasonal Operations. Harsh 0- iw EY _ winter freezes shut down St. Petersburg llyichevuk Nakhodka operations in most Russian ports. In Novorossijsk and Tuapse the _ 1988 M 9o ice-breaker fleet permits a minimum of activity to proceed Source: Seatrade year-round, but port operations are often curtailed by high winds in the winter months. 131 Chapter 7 Operations and Management in Russia's Ports: the Record of Over-Staffing :dSince the mid-1980s, the Port of St. Petersburg had to acconmmodate annual cargo volumes between nine and 10 .5 mllion tons. Typically this included seven million tons of cargoes in bulk form (of which 70 percent was. grain), between 2.5 and 3 million tons of breakbulk cargo, roughly 100,000 twenty-foot containers, and about 100,000 tons of processed timber. The port presently employs 5,356 staff who attend to all the activities related to vessel and cargo management. A public port in Western Europe with siniilar volume, niix of cargo, and frequency of ship movements requires less than one-third of the payrolled staff, that is involved in the operations and management of St. Petersburg's port. In; addition, much of the daily labor in West European ports is drawn from privately managed pools.; i Excess staffing prevails in almost all segments of St. Petersburg's organization scheme. With 2,898 workers, stevedoring represents the most significant group, followed by 1,201 employees who are assigned to operating port-based auxiliary vessels and cargo handling equipment. Facility maintenance and repair crews comprise 665 staff, and 231 watchmen guard the port's assets and cargo in transit. About 400 staff are assigned to tiaccounting duties. The harbor master's office employs 127. There are 30 middle and top management positions in the port. Housing and comnmunal services, health care centers, and other facilities supporting port labor add easily another 400 to 500 employees to the port's payroll. Thus, altogether the port of St. Petersburg has a total payroll of more than 6,000. The other Russian seaports are similarly over-staffed, and the proportion of employees assigned to the provision of communal infrastructure and services is even higher - up to 25 percent of the entire payrolls. For instance, in the Port of Vostochniy, 3,176 employees are involved in transport and cargo management, and 692 payrolled staff look after housing, schools, nurseries, medical assistance, produce farmning, and nmanufacturing of materials for construction and other port personnel needs. Unlike St. Petersburg, the places in which the other ports are located do not have sufficient cornMunal social infrastructure, and food supplies are less abundant.; Both facts have forced ports to reach for total self-sufficiency. These practices, born out of social need, have served their purpose. But the price was high in terms of low transport infrastructure efficiency and high cost burdens on national trade. New arrangements are urgently needed to meet the growing demand for streamlined ports services, while at the same time attending to the social needs of the local populations. Ports cannot - and should not - be expected to do both. * Deterioration of Physical Infrastructure. Novorossijsk, Tuapse, Sochi, and others have Port structures generally are in bad shape as a breakwaters - built almost 100 years ago - that result of many years of intensive operation need repair. The breakwater structures of all without repair and renovation. It is estimated that Sakhalin ports, built by the Japanese in the 1930s, deferred maintenance on port infrastructure are in urgent need of renovation and amounts to US$500 million, although this figure reconstruction. Overall, it is estimated that more does not represent any analysis of the economic or than a third of all quay walls are in imminent financial return for correcting these problems. At danger of collapse. Internal roads and rail tracks, present, 14,500 meters of the overall 41,500 quay as well as land-side access infrastructure are also wall berthing are reportedly in unsatisfactory badly deteriorated. This condition hampers cargo condition and some sections are close to posing movements and equipment utilization to a hazards to safety. About 87,000 tons of special significant degree. sheet piling will be needed but is not available * Over-staffing. Russia's seaports are severely through domestic production. The ports of over-staffed because they fulfill a variety of 132 Chapter 7 Exclusive Reliance on Railways for Land-side Access: A Major Constraint ST. PETERSBURG: In a very real sense, ports can process freight only as efficiently as the railways are able to (rail transports nearly 95 percent of all cargo passing through the port), and with a maximum daily throughput capacity at the port of 600 wagons (of which 500 are grain hoppers), the maximum tonnage amounts to 36,000 - 38,000 handled daily. The bottleneck is the shortage of rail cars and the time wasted in shunting those available. This shortage results in long ship turn-around times and a high proportion of idle time at berth. As a consequence, only 18 vessels can be handled simultaneously in St. Petersburg Port, and only 26 of 38 berths available for cargo handling are actually used. The oversupply of berthing space is expected to become more pronounced in the future as traffic volumes decline, but, pending reform of land-side port accessibility, will not improve ship turn-around times on its own. NovOROSSUSK: In Novorossijsk, practically all cargo passing through the port is handled by rail. Being Russia's busiest port, the situation is somewhat more complicated in that the maximum daily rail car throughput capacity is 350 to 400, thus limiting the port's daily throughput capacity to 21,000 to 24,000 tons. The practice of direct cargo transshipment from ship to rail car at the quay is time-consuming and impacted as well by rail car shunting and non-availability of rolling stock. This practice has long since been abandoned in countries with more efficient ports, where cargo is off- loaded into storage facilities from which rail cars are subsequently loaded as they become available. Direct rail access to the quay area does nothing more than impede the off-loading process and should be prohibited. VOSTOCUNY; In Vostochniy, on the other hand, most barriers to realizing maximum daily throughput capacities seem to spring from port operational shortcomings. Although the land connection is by a single rail line with an annual capacity of 30 million tons, average daily railway throughput capacity is 590 cars, or 35,400 tons. In practice only 21,547 tons are processed by the port. Maximum port capacity, however, is 84,300 tons per day, so in the event that maximum throughput capacities are reached, the railway connection looms as a major bottleneck. Irrespective of this, maximum annual throughput to date (11.6 million tons) was registered in 1989 and required less than 40 percent of existing rail throughput capacity. With plans on the part of local mining interests as well as the state to extend rail line capacity, it is unlikely that a railway bottleneck will develop in the near term, and the government would be well-advised to avoid sinking any investment funds into rail throughput capacity expansion projects and simply permit local mining interests to seek other partners and form a consortium of both domestic and foreign investors toward this end. communal needs and social services, like schools cover costs and there was no competition among and hospitals, farms and factories that cater for ports. Investments were, however, a different employees and their families. In many instances, matter. The basic arrangement was that ports and these services - which are totally unrelated to water transport companies were expected to cover trade and transport - represent up to 40 percent all operating costs out of their service revenue of a port's activities. The cost of managing such incomes, and the central authorities provided services consume a high proportion of operational required investment funds. This objective not only income (see box). made it more difficult for the government to * Heavy Silt. About 60 percent of the ensure that port tariffs covered fully allocated Federation's seaports are subject to heavy silting. costs but, in fact, was hardly ever adhered to, and Inadequate budget allocations for maintenance the FSU government had to allocate around Rb2O dredging - and shortage of appropriate dredging million each year as operating subsidies to equipment - have led to a situation whereby many shipping and ports. port basins and access channels have become too After the breakup of the FSU, the government shallow to accommodate large vessels. not only discontinued such subsidies but introduced new taxes and charges - 32 percent on Financial Perfornance and Related Issues ruble profits - and required 50 percent of foreign currency earnings to be surrendered and Russia's main ports traditionally had a positive exchanged for rubles at prevailing market cash flow because tariffs were set high enough to conditions. More recently, the government is 133 Chapter 7 requesting the ports to turn over all foreign Interim Statute on Operational Monthly Planning currency to the Central Bank at ludicrously low for Rail Movements of Freight for Export, exchange rates. The combined tax and mandatory confirmed by Russian Federation the government hard currency transfers from shipping and ports to Decree No. 936, dated 4 December 1992, seeks to the national treasury in 1992 were estimated to reimpose state control over freight movements. have reached a level of about US$400 million, The result is likely to be reimposition of inflexible equivalent. operating practices maintained previously on the Ports were particularly hard hit by these basis of State Orders for transport of freight, changes, and by delinquent payments by users for thereby driving private sector shippers into the services rendered. The resulting insufficiency of hands of road transport enterprises, and, in turn, funds makes correcting deferred maintenance of worsening the financial performance of the infrastructure and equipment more difficult. railways in freight operations. How this will affect Required dredging operations cannot be regularly land-side port access bottlenecks is evident: scheduled. Capital investments are limited to a further procedural delays will exacerbate an few ports, are of small scale and insufficient to already congested situation. A better alternative is repair ship and cargo handling equipment and to allow the market to determine the demand for damaged quay walls. transport and permit ports to set tariffs that adequately cover costs of organizing last-minute Governmnent's Goal of Independence and service rather than to state-imposed penalties. Self-Sufficiency Investments to Replace Lost Port Capacity. In response to the loss of port facilities after the While accepting the inevitable further decline in break-up of the FSU, ambitious development plans annual seatrade volumes through the mid 1990s, were conceptualized at a high the government the government's national ports development plan level to replace many ports by expanding the is driven by the objective to boost the annual entire national seaport system. Russian planners cargo handling capacity of the system to 240 estimate that the existing maximum established million tons by the year 2000. This would fully throughput capacity of the Federation's port replace port capacity lost to the Baltics and system is on the order of 170 million tons per Ukraine as well as expand port capacity in the Far year. Port traffic generated by Russian seatrade East in line with expectations of future growth of was about 260 million tons in 1990, of which only trade with Pacific Rim countries. The entire 164 million tons were handled in national ports, program is expected to cost about US$3.6 billion while the rest was accommodated in ports of the (1991 prices) over the next ten years. The Baltic States (47 million tons), Ukraine (42 preliminary plan provides for three phases. million tons), and Finland (seven million tons). Russia's international seatrade fell to 165 million Phase 1, 1992 and 1993. The main emphasis tons in 1992, almost all of which were handled at will be on efforts to switch Russian cargo from Russian ports, and is not expected to return to foreign to national ports. It is intended to achieve 1989-90 levels until the next century. With trade this objective through centrally directed routing of figures now roughly equal to overall port cargo, reforms in the operations and management capacity, the government can see the possibility of of individual seaports, and the use of river ports overcoming any dependency on foreign ports. The fishery ports, and industrial terminals, to provide goal of becoming self-sufficient in port services in extra capacity. The plan is to re-direct 17 million the long term is now seen as a real possibility and tons of cargo (exported coal, metal, imported has become a pressing concern within the grain) from the Baltic ports to St. Petersburg, government. Vyborg, Kaliningrad, Murmansk and The government has taken measures to address Arkhangelsk. Commodity flows currently handled this issue by re-centralizing the freight-forwarding by Ukrainian ports (exported coal and ore, functions that were slowly beginning to gravitate imported coal and metals, crude oil) will go toward more market-oriented practices. This Novorossijsk, Tuapse and Taganrog (exhibit 7.9). 134 Chapter 7 Exhibit 7.9 Characteristics of Key Russian Seaports and Proposed Investments, 1991 Novorossijsk St. Petersburg Vannino Vostochniy Petropavlovsk Cargo turnover 43.0 12.5 8.5 10.5 3.0 (million tons) Service revenues 146.6 280.0 121.9 134.3 86.6 (million rubles) Operating 67.2 163.0 96.8 97.6 80.7 expenditures (million rubles) Operating profit 79.4 117.0 25.1 36.7 5.9 (million rubles) Number of 3,809.0 5,356.0 4,028.0 3,176.0 1,943.0 employees (port operations only) Proposed (during period (during period (durng period (during period (during period investments 1992-1995): 1992-1995): 1993-1997): 1992-1995): 1989-1996): in rubles 54.0 mn 256.5 mn 1,800.0 mn 1,250.0 mnt 250.0 mn and in US$ 173.0 mnn 43.0 tnn 350.0 in 225.0 mn 30.0 mnn Cost estimates are based on 1991 prices. Source: MOT, Merchant Marine Department, and Soyuzmorniiproekt. Phase 11, 1994 to 1998. The proposal is to build Based on this plan, the government estimates the 14 new berthing complexes and to rehabilitate 48 capital requirements (based on 1991 prices) existing ones. Construction of a new port in the between 1993 and 1998 as follows: Baltic at Ust Luga and one on the Black Sea is also scheduled to begin. Ust Luga is intended to Northern Basin Ports: Rb150 million + US$ 42 million provide a 50 million ton crude oil export terminal Baltic Basin Ports: Rb869 million + US$176 million to replace Ventspils, Latvia. This port may Southern Basin Ports: Rb530 million + US$194 million include a 20 million ton dry bulk handling facility to replace the grain terminal at Novotallinn, and The drive to become fully self-sufficient in the an 8 million ton container terminal to replace the provision of water transport and related one at Riga. The government is contemplating infrastructure, however, is burdened with building a grain facility at Rostov-on-the-Don to difficulties. A number of the proposed investments store grain brought in through Novorossijsk, new to replace lost port assets cannot be justified on container facilities at Novorossijsk, and possibly economic grounds and they should be compared new oil and grain terminals nearby. with making lower cost arrangements to use ports in adjacent countries that are already built, well Phase III, 1999 to 2005. Several new ports will equipped, and likely to offer cheap rates to attract be built to accommodate forecast rapid growth and traffic since so much of their previous volume was regional shifts in annual seatrade volumes. Major Russian trade. Investment in ports already built expansion of key existing ports, and a concerted can be viewed as a "sunk cost," and port tariffs effort to improve drastically the interfaces between need only cover operating costs and any additional ports and inland transport modes requiring investment needs. Tapping the capacities of substantial investment in new rail trackage and existing, neighboring ports for the trade would be facilities, are planned. beneficial in many respects. Such a decision 135 Chapter 7 would force the Russian ports to become more ventures or special contracts with ports in responsive to user demands, which would require neighboring republics at mutually beneficia' Ates. fast and effective management reforms and Even if such facilities were built, there is no adjustments to operational practices, which are guarantee that they would be used. The freight presently inefficient. It is unfortunate that the forwarding industry has been privatized and open perceived need to curtail foreign exchange to competition in Russia. As more and more payments for the use of foreign maritime assets is industries and enterprises are privatized, their used to justify such high-cost investment managers will wish to make international cargo alternatives. Foreign costs of building new ports transactions that minimize total costs, including are likely to far outstrip the costs of hard currency transportation, inventory carrying costs, shipping port tariffs in neighboring countries. Unless costs and the time between shipment and sale. government is prepared to subsidize the entire They will turn to freight forwarders to arrange the effort of building new ports, rates will have to cheapest, most efficient transport, which may cover the full investment as well as annual involve existing ports in neighboring republics or operating costs. The drive for an independent port even overland freight to European ports. The system, however, is related to the demand by government is wise to leave these decisions to the governments in which these ports are located that market place, a development made possible by the Russian troops be withdrawn. At the moment it is government's laudable decision to privatize freight difficult to predict how and when these problems forwarding. Exports may generate more foreign can be overcome. The economic cost of the policy currency for Russia if, for example, enterprises of port self-sufficiency is very high were to ship products via land to ports in Europe The economic rationale is questionable, even if where there are more international carriers currently prevailing political imponderables are available to carry goods worldwide more quickly taken into account. Present and projected traffic and at cheaper costs rather than to insist that all levels are so much lower than before the breakup Russian goods be shipped in Russian ships and that, efforts to replace lost general port capacity Russian ports. may be unnecessary. For example, it may not be The investment plans need tempering for two necessary to replace facilities to import grain other reasons. Managers of individual ports were when imports have dropped from 25 million tons practically excluded from these deliberations, yet in 1992 to an expected 14 million tons in 1993. their expertise might have reduced overly The government hopes grain imports will be ambitious and ultra-conservative assumptions and reduced further to only 5.6 million tons in 1994. design parameters that carry the inherent danger In 1991, almost all Russian international trade of unwarranted over investment. The plans do not flowed through Russian ports. In 1992, although adequately take into account the tremendous trade increased from 129 million tons to 165 opportunities available for improving throughput million tons, again most of it was handled in and expanding capacity at existing ports, Russian ports - precise figures by port not yet particularly the productivity gains that could be available. The government is concerned, however, realized from the introduction of private and that existing ports cannot handle the higher trade competitive operations within ports. levels experienced in the past and expected in the Proposed port investments should be based on future as the economy recovers. As current levels realistic projections of economic activity and trade of utilization of Russia's remaining ports are development in individual ports. They should also estimated only about 60 percent, it is likely much incorporate assessments of shortcomings in of the lost capacity can be recovered through infrastructure and service regarding land-side measures aimed at making Russian ports as connections between ports and their different efficient as those in market economies. users. The need to replace specialized facilities may In terms of investment planning for the sector, theoretically be more legitimate but the costs and the costs of adding new port facilities must also benefits of doing so must be carefully evaluated compete with the need to protect and preserve and compared with opportunities to make joint existing breakwaters and quay walls, which are 136 Chapter 7 apparently in some jeopardy from lack of which role a port should play and which kinds of maintenance in the past, as well as to the need to investment are to be made. They have also resolve land-side constraints and introduce continued to fix service tariffs to be applied in all intermediate storage to remedy operational ports, although tariffs are now indexed to inflation difficulties. These investments are likely to be far and no longer fixed for five-year periods. morejustified, possibly essential, than investments The strategy should not be a blueprint for in new capacity. continued control by the central authorities in the The Association of Russian Commercial day-to-day matters of port operations and Seaports estimates that about US$500 million is administration. Instead, the strategy - once required to correct the most operationally established - should become a framework for important defects in the Federation's ports which, organizing the ownership of the land and physical because of increased taxes, the ports have been assets of ports, setting up operating companies to unable to self-finance. In 1991 there was a provide services, and preparing expansion reported need to mobilize Rb250 million to schemes in individual ports. The present finance required maintenance of port buildings and investment approach is wasteful and unnecessary other on-shore infrastructure; only Rb4O billion because many of the needed investments could be was actually available. Not more than 35 percent provided by private sector investors with long of the funding needed to replace equipment could term interests in maintaining port operations. Such be met. If these basic needs cannot be met, how a strategy cannot be developed by can the government afford to invest in new port Soyuzmorniiproekt, the State Agency for Port facilities? Planning and Design, as it does not support the drive toward self-sufficiency and privatizing of The government is hardly in a position to port operations in a competitive framework. finance unnecessary port capacity and, in any Rather, the strategy should be developed by case, if ports are to be privatized, investments MOT, in concert with GKI and MOF. should befinancedfrom individual port earnings. Development of the strategy must involve a Clearly, careful thought and analysis must be rigorous economic analysis of existing capital given to determine what investments are justified investment requirements, both for rehabilitating and what role the government might play in existing port facilities and for new port financing necessary investments. infrastructure investments. Individual ports should In view of the importance of the sector and the be encouraged to participate by developing their huge investments being proposed, there is a need own privatization and investment plans, based on to review and reassess the ambitious investment realistic demand forecasts, incorporating support agenda developed by the government. Any from the private sector wherever possible. Efforts effective strategy must take into account the to develop revenue sharing programs among ports efficiencies that a private and competitive industry should be resisted since they usually lead to each could bring, along with considerations relating to port spending more than is needed in an effort to the changing structure of Russia's economy, keep its own funds. The government should also international trade patterns, and possible resist establishment of a state-sponsored port improvement in relations with adjacent countries. development fund which would create dependency The strategy should also encompass how to assist and would in all likelihood not be conducive to privatizing and restructuring each port, to managerial discipline and independence of introduce an environment fostering competition individual ports. while allowing the national government to ensure that the development of national ports is consistent Port Restructuring and Privatization Program with national interests. Although the government's original intention was to let each port develop its A major objective of the government is to devise own privatization plan and decide its own an effective policy to privatize the ten Category I fortunes, the realities have turned out to be ports. The government was intending to privatize different. Central authorities continue to decide ports under a September 1992 directive that 137 Chapter 7 A Polic Ct; Aontext fior Government's Por Restrctug ad Privatizatio Prgram' * . To ensure that the commercial environment in the port providesJfor the competitive provision of s.ervies inafee market * atmosphere by t preivtcompanies, Government mst provide for the reassignment ..of ' eoperaonal,pannig, and. atministratefinctions amongp publ-sector agenciesrand private intrests.i seniat to this proceGss6 thedoption. o3f. . a tcomnprehensive regime of investment lasto foster priavateervestment.:: UN report o tpost restructuring statesi'The major elements of such afraework include statoyauthorityforprvateparcvaeton,deregulation, deentrazation : ;an ;anti-monopoy iregime fand at public-sector agency ;which Lbalances 'competing Interests; to entsure; that no -onef group -| 46can uinlize market mechanismto obtain a Imonopoly d t Emphass suppi.ed). Taken togetherd these elements aare ng0t0eceSsary and sufficient for an z;effeetive egagfiwerk: as dcribed below. eht-.. g a is p c 4 :(a) Priahe participation is essentialtocreate a basis for compeintionthat will advance the obj.ectves.of reduingosts .. mand improvingthe quality of goods and services offered. iThet nexusvbetween private enterpriaead competition is strong: dCompetition hieaves those obectives y compelling wschk enterprisest to fce commerciul risk- thde possibnlty R f fiE};:fnancial losses and thze threat of bankruptcy. Wit§hout :competitiron, privatization :would aount to little more than aCt - transer of port servicesb and portWfacilities from the complte control af governmentsto a .smilar 'degree of control by fff fpriv4te interests. ' This fwould permit private interests to increase promits wit/aO T any service or technical innovatz'ons- . ) 0AchievSing mnaxiumfreedomvfromeconomc regulatoryconstraits iscritical togsuccess cr e " 0i90;iTh 1e statutory iauthority should c learly define standards for japproval of private-sector proposals -and festablish iaifti 0 strong presumption rthat i'ncreased participaion will benefit the nation through increased competition, im orderk to a void iC0; theendless problems'anddelys ofktrying to satisfyfiieprecise regulatory requirements.: . However, the total absence of regulations could lead to non-commerci l ab.uses by. pr.iate interests. Asa consequence, governmnents must Vretain suffJicient control overi port activities through anti-monopoty regimes to Xensure: f thaSt no grOup of the port commnunity is able to insulate itse(ffrom market forces ad extract monopol rents.; -7$ 70$X Xt;(c) XDecentralization relates not only tothe questionof tranferring power over non-national aspects ofpublic ports ; -away from the central .government to local bodies, but also to. " . . a cbalncing of the interests of the public setor: dominant groups arduiseis so that commnercial goals might be achieved. Decentraliation does notmean the elimination 0 of government involvement, but it should be structured to ensure on-site porvtadministrators, boards of directors, and private interests havelsufficient commercialfreedom to set their own tariffs anl to adjust quickly to changing market conditions. A decentralized national port systemn should be structured tto fprovide such groups with thec flexibility: t o ; operate their facilities commnercially io planfJor and make neXeded investmnents,f and to work with urban authorities so: that competing land-use problems might be resolved. fd) The anti-monopoly policy serves to ensure that economic competition fexists so that efectively competing private interests cancontribute to the comercial viability of the nation 's internaionaltraderelations. A soundframemork r e of #anti-monopoly policyhand law is essential to ensurethat the transfer of atpublioc sector monopolyto private Interests fdoeshnot confer monopoly powersand benefits on privateaowners. :; :E; (e): T Ihe public sector agency must balance competing interests in the port and provide ' wan instititional frmework :which emphaszesfreedom rc of entryfinstead of protection, managerial autonomy to earn a profit through competihon instead of access to the national treasury laws of the marketplace instead of day-toy bureaucratic involvement, and anti-monopoly regimes instead of the political influence of dominant groups." .. .... . Transport and Communications Division of he EconomicCommissionfor Latin America andcthe Caribbean T.he- Restructuring of Public-Sector Enterprises f Ihe Case of Latin American and Caribbeana Ports (Santiago Chile: U.N. Economic CommissionforLatin America anddthe Caibbean, 1992) pp s-a10 138 Chapter 7 encourages the creation of competitive operating and maximizes efficiency. The danger is real that companies within Russia's major national pressures will be brought to bear on the seaports. Initially there were pressures for the government to subsidize provision of shipping government to modify this directive and permit services and assist ports that serve this low-level privatization under Option 2, by which 51 percent trade to maintain basic infrastructure and to keep of the stock could be owned by labor and basins and access channels sufficiently dredged management with state ownership limited to 20 and ice-free. The current cost of attending to these percent. More recently, it appears that port labor needs exceeds revenue incomes by considerable and management prefer Option 1, in which margins in more than 70 percent of Russia's workers and management can own up to 40 seaports. percent of shares, but 25 percent of the workers' share are non-voting. In deciding which approach Introducing a Port Authority. In a directive to take, two principles are important: issued in early 1993, the State Property * The government should retain ownership of Committee established maritime port the strategic physical infrastructure and port real administrations that will own the port estate, including breakwaters, quay walls and infrastructure - berths, breakwaters, entrance navigable approach channels. It should lease the channels, railway tracks, and roads - and lease port's quays and operating assets on a long term the operating facilities to private companies. This basis to private operators. directive represents an excellent and consistent * The government should not finance any port modification to the pattern of sound policies on investments nor give sovereign guarantees on port privatization that the government established loans to port authorities or enterprises in the with the decrees of September and November absence of a financially viable plan for a 1992. Amending the port privatization directive to competitive restructuring of the port. introduce a port authority function will clarify and Modifications of the September 1992 port institutionalize the proper roles of the government privatization directive issued in November 1992 and the private sector in the ownership and and early 1993 appear to be consistent with these operations of Russia's strategic national ports.7 two recommended principles. The port authority framework provides the ideal mechanism for achieving the twin objectives of Privatization or Self-Sufficiency of Category II retaining state ownership of key infrastructure and III Ports. The majority of national water assets and fostering effective competition among transport and related port assets serve private sector interests for the provision of port communities in outlying regions, most of which services. The need for private sector participation are located along the Arctic Ocean rim and the is well expressed in the United Nations report on country's northeast. Here cargo volumes are port restructuring: small, and much of the trade flow is unbalanced "The fundamental reason for the participation of and too small to enable the outports to earn private interests in public-sector enterprises is to enough revenue to cover their costs. The create a basis for competition so that costs might government has decided to devolve responsibility be reduced and the quality of goods and services for these ports to local and regional authorities. improved. Competition achieves those objectives Such a decision is laudable, but pressures may by compelling such enterprises to face commercial ultimately be brought to bear on the Federal risks, the possibility of financial losses and the government to assist in subsidizing some of these threat of bankruptcy. Without competition, operations where local and regional funds are privatization would amount to little more than a insufficient to do so. Any such subsidies should be transfer of port services and port facilities from considered at the Federation level only if the the complete control of governments to a similar services meet an essential national need, cannot be degree of control by private interests. This would met otherwise, and do not harm Category I ports. permit private interests to increase profits without Moreover, care should be taken to ensure that any any service or technical innovations or such subsidization scheme minimizes investment improvements in productivity and cost- 139 Chapter 7 effectiveness. Put another way, even though November 1992 and January 1993 each national private investors usually equate success with port is requested to develop, within two years, a profits, competition would limit their freedom to plan for privatizing its operations in the context of unduly raise port charges."8 a competitive framework (see Annex D). The port It is important that there should be several authority approach described above would fit competing operating companies, if possible, easily into the framework of this privatization law. awarded concessions on the basis of a Each "maritime port administration" could performance contract that keeps profits to a establish a Board of Directors that would offer its justifiable level and rewards improvements in assets for independent operation by private sector productivity and efficiency. In some ports, for interests through contracts. Federal and local example, there may be enough business to have governments would be represented on the Board several stevedoring companies that compete for of the Port Authority along with key shippers, work at the various berths owned by the authority. other transport officials, bankers and In others, it may be that operation of all the berths representatives of other parties interested in is contracted to a private company after ensuring that the port is effective and efficient and competitive bids. Other ports may have separate that the operating companies to whom the assets and competing break bulk or container terminals, are leased are meeting the requirements of their depending on the nature of the port throughput performance contracts. The Port Authority's and physical possibilities of each port. Board would be the agent for the creation of the port's privatization plan. Given the lack of Implementing the Restructuring Process knowledge within each port as to how to formulate such plans, the government may wish to Complementing the policy framework must be a consider obtaining assistance for each port to restructuring process rapid enough to avoid foot- develop its port privatization plan. Such assistance dragging by dominant groups such as labor or could be provided to ports through bilateral grants public port managements that have an incentive to or multi-lateral institutional loans. Ideally, this retain the status quo. In the words of the UN consulting assistance would be provided through report: highly-qualified professional service firms and "The logic of piecemeal restructuring of public- through specialized firms affiliated with western sector ports appears at first unchallengeable ports operating on worldwide "best practices" [since] it would permit all those in the ports standards. community to slowly implement changes in order When the plans for privatizing each port are to reduce political and social costs. Nevertheless, completed, they should be reviewed by the the unavoidable rigors of global trading will government. As part of an effective review require governments to continually restructure process, the Minister of Transport, GKI and other their public-sector ports so that productivity might government bodies involved in implementing be improved and costs reduced in order to privatization plans for the ports should ensure that enhance the competitiveness of their goods in pro-forma traffic and financial projections are international markets. In addition, if dominant realistic and are consistent with forecasts for the groups have an extended period of time to comply Federation's overall seatrade volumes. In assisting with market-oriented changes, they will have more with this restructuring, anyframeworkfor analysis than enough time to influence the laws, or strategy developed by the government for regulations, and policies which are utilized to dealing with its national ports should not be create the commercial framework. Thus the considered as a blueprintfor continued control by piecemeal implementation of private participation central authorities of the day-to-day matters of in public-sector ports could result in a self- port operations and administration. Nonetheless, defeating regulatory strategy which achieves the government will have to be involved in objectives precisely opposite to those intended."9 organizing the institutional framework for Under the Russian privatization law as amended managing the ports' physical assets, for by directives issued in September 1992, developing a regulatory framework within which 140 Chapter 7 these ports will operate, and for maintaining - is important for the government to foster such through the port authorities - an appropriate competition to the extent possible by, for example, permanent public role in the ownership and use of carrying through with the privatization of freight vital national port infrastructure. forwarding so that shippers can choose the least In devising a competitive framework within cost route in and out of Russia, including, if which port privatization should take place, cheaper, the use ofports in neighboring countries. consideration should be given to the fact that the major seaports are far apart. This means that the Once ports have been privatized and a concept of letting ports privatize and compete for competitive framework develops, perhaps using a trade with each other, with little need for the system of port authorities as the stewards of the government to oversee their activities beyond government's interests, ports should be free to ensuring that collusion does not exist, (a course of keep their earnings to ensure their long term self- action quite successfully applied in other sufficiency. If this is not done, then the new tax countries) cannot be completely relied on in regime that applies to ports and the continued Russia. In the case of the country's main gateway requirement of exchanging hard currency earnings ports there is little scope for Russian-based port to at artificially low rates should be reconsidered. port competition, as the ports are either singular Furthermore, ports should be free to refuse in their region - St. Petersburg in the Baltic and service to delinquent customers and the Novorossijsk in the Black Sea - or too specialized government should take steps to settle the in particular types of cargo. substantial arrears owed to ports by state enterprises. On the Pacific coast, Nakhodka, Vladivostok, and Vostochniy are located within a radius of 70 Who Should Own the Ports? Port managers and km in the southeast along the Pacific rim and are unions are pressing to modify the September 1992 ice-free. This setting is ideal for inter-port port privatization directive to permit privatization competition, but the prospects are dampened by under Option 2, in which 51 percent of the stock the fact that each port was developed and is of the port joint stock company would be owned equipped for mutually exclusive types of cargo. by labor and management. While this option is not Nonetheless, some competition will emerge if one inherently incompatible with permanent the port becomes too greedy in its charges for any government ownership of the national port particular type of traffic because it will lead to infrastructure, either directly or through a system building new facilities at other ports to compete of port authorities, it does pose problems for the for this traffic. Even though the possibilities may effective development of a port restructuring plan seem limited, the government should be that creates competitive operating companies encouraged to set policies that encourage within the port during the two-year period competition between their own ports. Even more specified by the privatization decree. More important, the government should set policies that recently, port managers and workers are adopting permit competition with ports in neighboring Option 1, under workers receive as a gift 25 countries in order to put pressure on their own percent of the preferential non-voting shares and ports to be as efficient as possible.'" In the case of they can purchase as much as 10 percent (in actual St. Petersburg, there is of course potential subscription) of the common shares. Managers can competition from Finnish and Baltic ports, to the purchase as much as 5 percent of the common extent these countries make custom procedures shares, with 60 to 75 percent of common shares and transit arrangements simple for Russian trade. available to investors. Option 2 has no provision Faced with these geographic realities, it is all the for either a gift of preferential shares to workers more importantfor the government to support port or for purchase of common shares by managers, privatization plans that result in the setting up of but provides for purchase of as much as 51 competitive companies within ports but also to percent of the common shares by workers in a retain its voice in the overall evolution of its closed subscription with the remainder available to national ports in this process. At the same time it investors. 141 Chapter 7 The lack of funds available to workers is one and port capacity inefficiently and under-utilized. factor influencing recent decisions to choose To alleviate the problem where practicable Option 1. Under both options, the availability of physically, port operators should permit, and even significant amounts of common shares for public encourage, for-hire trucking companies to sale should permit substantial foreign investment compete for drayage at ports as a measure to ease in Russian ports, which would be beneficial within the shortage of rail capacity for loading and the context of a properly run port governed by a unloading of ships. In addition, ports should Russian maritime port administration. Given an consider establishing temporary storage facilities equity position, foreign investors are potential at off-port sites, possibly including floating grain sources of modern equipment and port storage, to expedite deliveries and reduce ship management practices. The port of Vostochniy is waiting times. Several specific projects of this in the process of preparing such a plan. The nature have been evaluated by EBRD-financed existing managements and labor forces will consultants and appear worthy of serious certainly be needed to continue the operations of consideration. the ports during this two-year period, and there is no reason that they should not compete for Make plans to restructure road and rail access operating contracts as part of a competitively- facilities to critical port installations and assess structured port complex. investment costs for these improvements. To alleviate longer term problems, plans and cost Near-term Recommendations estimates should be prepared for changing the quay-side dependency on direct railway loading Preserve critical operating capabilities in Russian and unloading. These changes will require (a) ports. Maintaining the minimum essential level of removing railway tracks from the quayside and service needed to ensure the movement of cargo moving them behind the port pavement, (b) through Russia's national ports has high priority. repaving quays, and (c) possibly purchasing more To this end, critically needed equipment and spare appropriate cargo handling equipment. Attention parts should be purchased; the World Bank is should be given in the near term for assessing the assisting in this area wiLh US$10 million for port costs of making changes to port infrastructure equipment at St. Petersburg and Novorossijsk. necessary to ensure more effective handling of Efforts should be made to remove physical and port cargo in the longer term, since these costs operational bottlenecks. Port areas should be will have to be factored into port privatization and cleaned up and unclaimed cargo auctioned off. investment plans. Cargo handling operations could be more efficient if managed in accordance with world practices, Take measures to ensure self-sufficiency of but effective implementation of these practices will national ports and to eliminate the government's depend upon the adoption of fundamental reforms centralized fixing of port tariffs wherever there is that put ports on a commercial and competitive effective competition. The once profitable financial basis. Storage rates should be raised for cargo left performance of ports has begun to deteriorate in in the port longer than five days as an incentive to the wake of rapid inflation, the decline of the shippers and consignees to document shipments in ruble vis-a-vis foreign currency, the failure of a timely fashion and stop using scarce port tariffs (determined centrally by the Russian MOT) acreage for storage. to keep up with inflation, and the requirement that ports remit all foreign currency earnings to the Take measures to reduce the dependency ofport central government. The tariff issue can best be operations on the availability of rail cars at quay- addressed by introducing competition within and sidefor unloading and loading ships. The practice among ports so as to leave rate setting to the of loading and unloading ship cargo into railway market place to the extent possible; a second best cars is becoming a bottleneck in the ports because solution is to permit tariffs that enable ports to railway cars are not always available when earn a sufficient rate of return to attain self- needed. As a result, ship waiting time is too great sufficiency in the long term. Although 142 Chapter 7 determining the extent and value of assets levels to worldwide best practices standards and necessary to essential port operations is often sizing facilities to demand-related levels may also difficult, as a near term measure it makes more be required as part of their efforts to develop sense than having the government subsidize port privatization plans. Several seminars discussing operations and investments on a case-by-case modern port practices, cargo handling, accounting basis. The government also needs to permit ports and managerial practices have already been given, to retain foreign currency sufficient to cover the most recently by EDI in conjunction with the foreign costs of necessary recurrent and Finnish Port Authority, but actual needs are very investment expenditures. These financial issues are much related to the developments in each port. In an integral part of the operating and corporate any case, efforts to assist with restructuring port structure adopted by each port and the port sector organization and ownership of Russia's national as a whole. ports should be provided where requested. The EC is supporting technical assistance for the Permit ports to refuse service to non-paying modernization of St. Petersburg. The EC is also customers and to permit auctioning unclaimed supporting consultancies for master planning of cargo to clear backlogs. Ports cannot be expected St. Petersburg. According to MOT, the United to subsidize customers and survive in the long States will assist in reorganizing some Black Sea term. Thus ports should be permitted to refuse ports and possibly with some expansion of several service to non-paying customers and to restrict Far Eastern ports. Unfortunately, in some cases extensions of credit for port services to state the multitude of donor-supported studies may enterprises. Ports should be permitted to auction cause confusion and do more harm than good off, or hand over to GKI for auctioning, assets (there are eight consulting firms studying left unclaimed in ports for long periods. problems in St. Petersburg alone). It is recommended that some effort be made to Reaffirm port privatization policies and launch coordinate such efforts. Most importantly, all such assistance efforts to help ports implement them, assistance should be geared toward assisting these including provisions for maritime port authorities ports in becoming privatized. to own port infrastructure assets (such as quays, breakwaters and navigational channels) remaining Reassess the national port investment plan and in state ownership. The port privatization policies limit any government support of port investments prescribed in a joint October 1992 directive from to those justified with cost/benefit analyses and to MOT and GKI are an excellent framework for those undertaken in the context of port specific launching the privatization of Russia's national corporatization, privatization, or restructuring ports. Unfortunately, opposition to these policies plans with loan agreements structured began forming within ports, as labor and appropriately between port and the government. management preferred to privatize under Option The government's proposed port investment plan 2. The government should try to address the is too ambitious and unwarranted in view of (a) issues in a way that permits privatization of port the potential for improving utilization of existing operating companies to go forward, reserving port ports, (b) the possibility that the plans are overly assets as part of government-owned maritime port designed and (c) the need to measure investments authorities. The use of the port authority approach against the opportunity to use existing ports in will provide an institutional framework, within the adjacent countries. Even where investments are purview of the MOT/GKI directive, for an initial found to be worthwhile, the government should step in corporatizing the port's assets, as a basis terminate programs that finance investments, for the development of a proper port privatization including the expansion of port facilities or the plan. acquisition of new port equipment for ports unless Technical assistance in areas of institutional they are done in the context of restructuring the development and enterprise reform will be ports into commercial operating companies, in a required. Planning assistance to help ports develop way that ensures that the government's investment long-term plans based on raising productivity is repaid over time with port earnings. To the 143 Chapter 7 extent such investments have already been made, environmental problems is essential, and it is the government should organize some formal possible that the recently-formed MOT may need transfer of the responsibility for repayment of some assistance to develop its capability for existing debts incurred on their behalf to the undertaking these assessments. On the other hand, benefitting enterprise. appreciation of MARPOL requirements at the port level is high, so it may be that little outside Establish policiesfor devolving responsibilityfor assistance is needed and that MOT can undertake the planning, construction and financing of ports environmental assessments on its own. to local authorities. For Category II and III ports, the government intends to devolve responsibility Begin implementing port privatization plans as for their operation and development to local and developed and approved by ports, GKI, MOT, and regional authorities. To this end, the government newly created Port Authorities. will need to develop procedures by which the transferring process will take place, as well as Assist MOT to revise the legal and regulatory policies for establishing a subsidy program, if framework in the port sector in conjunction with necessary, to support these smaller ports in a privatization plans. The legal and regulatory manner that encourages efficiency and minimizes framework under which ports will operate is a costs. In the course of devolving these ports, the crucial issue but cannot be defined in the absence government may wish to establish policies by of an effort to restructure the port sector nor in which any local and regional governmental the absence of knowing each port's privatization subsidy program necessary to operate them is set and restructuring plans, each of which should be up in a way to minimize cost and promote tailored to the specific potential for competition, efficiencies. In the near term, such policies might within and among neighboring ports. In the course involve the need for subsidies, introducing of developing this framework, an effort should be measures that tie payments to services rendered made to establish a capability within MOT to according to certain throughput, average cargo promulgate operational, environmental, and handling figures, ship waiting times, or berth maintenance standards for the ports and maritime occupancy rates. In the longer term, the provision industries. In the context of privatizing ports, of maritime/port services to Northern Zones ensure that each port offers its services on an should be put to competitive bid. equal basis to all carriers. Medium-tenn Recommendations Assist ports in restructuring and privatizing ancillary activities. Ancillary activities should be Enhance MOT's capacity to undertake economic privatized and separated operationally and and environmental assessments of proposed port financially. As in all socialist countries, the investments. Develop within MOT the capability waterborne transport sector is burdened with a to analyze the financial and operational number of manufacturing and design activities, performance of Russia's international ports and of ancillary to its operational functions but provided their vessel traffic control systems, so that it can by the sector in the past. Such ancillary activities develop appropriate policies for the structure and should now be managed separately and eventually operation of a private, competitive, financially established separately or privatized as soon as self-sustaining ports system. Many proposals are developments in the economy permit. Ports should being discussed in Russia that involve the building not be required to provide and maintain of new ports, new container terminals, deepening community services and infrastructure. of existing ports and so forth; each raises environmental issues associated with the building Assist ports in establishing a safety net for of a new port anywhere. In addition, there is a managing staff redundancies. There is substantial need to ensure that all Russian ports comply with over-staffing at most ports by world standards, MARPOL conventions regarding the disposal of and substantial redundancies may result from wastes from ships. Assessment of these privatization that involves competition. The degree 144 Chapter 7 to which there is a problem from redundancies Ministries of Merchant Marine (MINMORFLoT) and depends on retirement/redundancy packages and River Transport, which also controlled the on the value of the stock in the port companies provision of port services. Investment decisions, left behind. If the workers own the stock of the service arrangements, productivity targets, and ports that become efficient and financially solvent, service charges were centrally determined, and and if the ports are permitted to retain foreign each unit followed instructions according to a currency to maintain their self-sufficiency and centralized plan. The rationale for this central become profitable, perhaps they will not mind direction was the strategic importance of the losing their jobs. The degree of the problem is maritime sector earning hard currency, its defense entirely dependent upon the nature of the port support role, and its importance as a low-cost restructuring and of the framework of competition source of transport for Soviet overseas trade. for the entire port sector. It is possible, however, Within this government-organized framework, that dockers will require some sort of organized the maritime and river sectors were operated by staff reduction scheme in order to get them to huge commercial shipping companies, called accept the same sorts of changes that have "concerns," that were organized on a port basis occurred in the western world. and held virtual monopolies for water transport operations within the regions served by those Long-term Recommendations ports. Responsibilities of the concerns included the construction, fabrication, maintenance (including Complete the restructuring of the port sector and dredging), and operations of waterways, port and continue to lay groundwork for development of a terminal infrastructure, non-rail land competitive private sector. In the long term, port transportation companies, vessels and support restructuring should continue to develop through equipment, manufacturing and repair activities, various steps that include (a) continuing the commercial agencies such as freight forwarders, rationalization of unnecessary port capacity, (b) and vessel operating companies. Concerns in the continuing to develop policies and practices to river sector were also responsible for inland promote competition within and between ports, so waterways and locks. These massive, vertically- that regulation by the government can be integrated shipping companies in effect owned and minimized;, and (c) integrating the development controlled all the assets and operations in the of streamlined customs procedures and electronic maritime and river sectors, including a wide array data processing of custom and trade information of social services for their employees which with modern port and maritime practices. included housing, hospitals, kindergartens, and recreational facilities (exhibit 7.10). Introduce competitive bidding for the provision of maritime and port services to low density Maritime Transport northern zones. The government must provide for essential maritime service and port capacity to the Russia's merchant marine fleet of nine ocean remote northern zones and Pacific Rim carriers (described in detail in Annex E) communities for which there is no other type of comprises 57 percent of the former all-Union access. To provide this service more efficiently, merchant marine fleet. This capacity enables it to MOT should offer service packages for bid to handle roughly half of Russia's international competing liners and organize port subsidies on a seatrade. In line with efforts to privatize transport performance contract basis. operations where possible, the government dismantled the Ministries of Merchant Marine and Russia's Maritime Transport and Inland River Transport and permitted the ocean, cabotage Waterways Sectors and river transport carriers to become independent, self-accounting, commercial During the Soviet period, management of the undertakings. Although still state-owned, they are ocean, cabotage, and river transport fleets was free to establish and follow their own corporate centralized in two government agencies, the strategies, with a few important exceptions: rate 145 Chapter 7 Exhibit 7.10 Typical Shipping Company and Port Operations Organizational Structures Department of Marine or River Transport l ~~~~~~~~~~~~~~~~~~President of thel Company (5 Vase Prsidnata)l Building and Che nierFinane and oeain esne Facilities.Cie ngne Econotnica jpmin esne Building Comnurercial Construction Technical Planning All SalesrandlStaff/Labor Company Management Enteprises Marketing Management Equiptment Supply- Security and Adniinistrslion Fleet Display Training Safety Shipbuilding Management of Finance and Yardsa Ship repair and Accounting Port Operations- Certificationa Shipbuilding Information Safety Ship repair Yards- Communications Systems Regulations and Kitchen- Certification. Truck and Rail Social Benefitst Supplies Operalions' - Apartment - Hospital Po-r and -Kindergarten - Rent Homes Utility Plants' - Spoils Facilities = Non-Core Maritime Enterprises and Functions Controlled and Managed by the Shipping *Concern' Source: EBRD Waterborne Transport Sector Survey, July 1992, p. 4-67 setting, tonnage disposal and ship acquisition. old and technologically outmoded. The average Some of these carriers are increasingly engaged in vessel age in the Federation's merchant fleet is cross trades or in flagging out ships to other 16.8 years (exhibit 7.11). countries, in an effort to earn foreign currency To generate foreign exchange income to and become financially self-sustaining. About one- alleviate these problems, Russian shipyards are third of the Russian-owned fleet was engaged in also serving foreign clients. Almost half the output cross trades during 1992, more than double the of the Federation's shipyards is for foreign clients tonnage two years earlier. Many of their ships are (exhibit 7.12). In contrast, almost 70 percent of 146 Chapter 7 obligations were estimated to have Exhibit 7.11 Merchant Fleet Age Distribution, 1992 reached a level of about US$300 million in 1992. Their independence Percent, corfresPonciing lieet cornPosition should be encouraged, as the 60- i i i i necessity to be self-sufficient is i --,i ! ; obviously pushing restructuring at a 40 ............ ..... .... . .. ... : : --- - far faster pace than if the government . . R i i tried to manage the transition. Even ao - -- - - - - - - - - - - - - :--- K -- - - - .. . . . . . . -- - - - - - - -I - - - - - - - i E _ in the cabotage trades, much tonnage is now carried by chartering-in foreign-owned tonnage. Th e 10- . | ._i. 4_| L|-Sl.l@ l . .government should be encouraged to end all effective control over the decisions of shipping line managers less than 6 6 - Q 10 -14 16 -19 20 - 24 rotoe than 26 regarding ship scrapping and age, In yearE acquisition and regarding the setting o Oil TanKors M Dry BuIKers Ei container shis of service charges by shipyards. Gen Cargo Snips M Feerer Vessels E3 RoRo Snhis These trends result in part from the Sourc* Pegisier ol SI,ing, St. PetersbDug fact that the commercial maritime fleet is not suited for the work it is expected to perform. Most of the new building orders for Russian fleet renewals are ships were ordered by central procurement presently placed with foreign yards (exhibit 7.13). agencies that committed serious errors of Russian carriers also prefer foreign yards for judgment in ordering different types of new repair, upgrading, or conversion, admitting that tonnage. These decision-making processes took such practice is costly. The higher expenses, even place without input from the carriers. As a result, if in foreign exchange, are considered to outweigh specialized tonnage for which there is no the perceived risk of technologically inferior and productive use was ordered on a massive scale. tardy services offered by local yards. These developments demonstrate the effectiveness of corporatizing and making independent the Exhibit 7.12 Ships on Order in Russian shipping lines. Yards, January 1993 In theory, central authorities retain the right to fix service charges and to authorize ship scrapping Russian Foreign or acquisition. A growing number of national Tonnage Interests Interests on Order Percent Percent carriers and yards have started to disregard these Yard dwt Share Share rules because of the demise of the former | ,1 4 supervisory agencies, the Ministries of Merchant Marine and River Transport. The present Baltic 59,080 23 77 administrative chaos among the new government Volgogr 63,000 44. - 56 entities to which sector responsibilities were transferred has created a situation where, Vyborg 95,359 100 l- fortunately, no effective control arrangements are Yantar 67,500 11 89 exercised. As a result, carriers turn over their Tot 353,109 52 48 shipping assets to flags of convenience, and organize and charge for their services as it seems under Maltese flag. to best fit their interests. The fact that many | l Russian trade organizations are in substantial NSource: Fairpisy, 1993 NLwbuildinoSupplemntl lNo. 17, London.l arrears to national carriers for services rendered contributes to such corporate behavior. Payment 147 Chapter 7 Exhibit 7.13 Ships on Order by Russian Interests, January 1993 Shipyard Vessel Type Total Capacity Interested Party (Nationality) (Number) dwt -Baltic S ::Yantar .(RUS) : General Cargo (5) 7,500 Baltic :(RUS). RoRo (1) . . . 13,480. Warn ow ~(GER).. RoRo .(2) .34,910 Subtotal 55,890 Northern SC Vyborg (RUS) General Cargo (1) 4,069 Sakhalin SC.. Sedef Gemii (ROM): General Cargo (7) 28,000 SOVCOMFLOT Miho (JAP) General Cargo (2) 19,190 :Government : Howaldt ;(GER): Container (3) 120,000 Viana (PORT) General Cargo (7) 21,000 Galatzi (ROM) General Cargo (2) 8,000 RoRo (4)12,000: Vyborg (RUS) General Cargo (17) 91,290 : :; :- ;:: i:-::: :Malta i:(MALT) i General Cargo: 3) 23,100 Kvaerner (NOR) Ice Breaker (I) 5,200Q. RoRo (1) .10,850 Rousse (BULG) Tanke r: ( 2 100 Product T er (1) . . 3330 urnu ::(ROM) Tanker ( 44,40G0 Kherson (JKR) TProduct Tanker (5). 137,592 . General Cargo (1) I20000 :: Szczecin (POL) Support (2): 2,794 Nervian (ESP): General Cargo (2) 14,16 ~~:Subotl 1311816: Undisclosed Volgograd (RUS) General Cargo (10) 27,500 Admiralteiski (RUS) Tanker (1) 39,760 Kherson (UKR) Special Purpose (1) 7,640 Sterkoder (NOR) Reefer (2) 6,000 Subtotal 74,900 Total. (88): 709,865: Foreign yards (53) 492,266 Source: Fairplay. 1993. *Newbuilding Supplement No. 17'. London Understandably, shipping lines do not want to Although the government has established a allocate their scarce funds to buy new vessels policy of privatizing shipping companies, the pace unsuited to their needs. The only remedy now of privatization has been slow. Since most available to the shipyards to ensure that some shipping assets are still state-owned, most water revenues are earned is to charter these vessels out transport companies are still public carriers, even to foreign interests on a long-term basis at if they are corporatized. Within the latitude of the relatively low costs. privatization decree, managements can decide on 148 Chapter 7 the details of their privatization plans. Some corporate structure and operations are complicated carriers have already decided that joint ventures by multiple associations with entities in the with foreign partners are attractive propositions. different CIS republics. Instead of trying to keep Such joint ventures can be service-specific, within Morbank alive at any cost, the government should defined trade regions and for limited periods. design a process for the orderly liquidation of this They can also take the form of permanent inefficient financial institution, in cooperation with partnerships. In the light of current financial the concerned interests in the other republics. In constraints, the latter form of joint venture may place of Morbank, ship mortgage banking should gain particular attractiveness. The foreign partners be carried out in Russia as a line of business of a would finance the cost of vessel repair or reformed, vital, and private investment banking technological upgrading, or even of new tonnage industry. acquisition. In spite of the overwhelming evidence of falling The lack of effective domestic financing traffic and excess capacity in the fleet, the institutions for the water transport industries has Federation's President issued a decree in June been critical for national carriers. The observed 1992, "The Program for Renovation of the growth in Russian tonnage transferred to flags of Merchant Marine". Parliamentary committees convenience is due in large part to these have already approved expansion plans that circumstances. Since national water transport provide, among other provisions, for 7.7 million assets historically could not be mortgaged, foreign dwt of new ship acquisition. To mobilize funds banks have made out-flagging a condition of for such purpose it appears the government has lending for the acquisition of new ships. And decided to create a fund consisting of a Rb196.4 although the government passed a special law in billion fund to be financed from foreign exchange 1991 that permits the mortgaging of national revenues earned by the national carriers. An assets, including ships, there is no perceivable additional Rbl4 billion is provided in MOT's trend among Russian ship owners to take approved investment budget for fleet replacement. advantage of the law since there is no private Given the slow growth expected for Russia's banking industry to finance the mortgage. During international trade, however, the government may the Soviet period, state agencies were set up, wish to reconsider the earmarking of foreign either to provide financial assistance to the water currency for such purposes. At the very least, transport industry, like Morbank, or to centrally funds used to purchase vessels for privatized manage tonnage acquisition, like Sovcomflot or shipping lines should be fully repaid by the Sudoimport. Under a market economy, such beneficiaries. agencies no longer carry out functions appropriate Moreover, the companies should be free to for the government. Nonetheless, these agencies select their own vessels. Any continuation of are still owned by a multitude of interest in the centralized fleet renewal or expansion planning, FSU's maritime republics, they are located on likely as it might be to be based on executive Russian territory, and the government is intent on arrangements and the old style tonnage allocation, taking them over. The issues associated with their would turn out to be counterproductive and would current multinational ownership are proving deprive individual carriers of their much needed difficult to resolve. freedom in corporate decision-making. Central These special financing and procurement authorities initially may be concerned that the agencies should be discontinued and the vessels national shipping companies will desert the under their ownership should be fairly distributed country, once they are given complete freedom to among the different shareholders, which could be dispose over their fleets, but this is unlikely to expected to ease the resolution of the issues happen. Most of the Russian fleet consists of related to multiple ownership. Morbank, which tonnage with relatively low carrying capacities, was set up in 1989 as a specialized financing which also applies to the majority of ships on institution for the Soviet maritime industry, has order by the national carriers. In addition, general not lived up to expectations. It has a poor cargo ships represent the largest portion (41.5 reputation among Russian carriers and its percent) of the Russian fleet, which is to be 149 Chapter 7 explained by the types of cargo and trading Many of the river and maritime carriers now patterns in which the fleet was - and largely own shares in several of the trade and industry remains - involved. Vessels of such configuration service organizations alongside with different and size are not very suitable for effective government institutions. Complex cross- competition in the international seatrade markets. ownerships materialized with the result the some Most managers of the national shipping companies carriers are effectively competing against have indicated that they have no ambitions to themselves. More importantly, however, there is compete against the well-established international the imminent danger that many of the untraceable carriers with their extensive service networks. The cross-ownerships and management arrangements national carriers remain dedicated to serve may effectively lead to the formation of cartels, national waterborne trades but expect an enabling whose members are more interested in their environment as a precondition. financial fortunes than in the facilitation of national trade. The urgency for the government to Another factor diminishing the competitiveness probe into these developments and to intervene if of Russia's carriers is their aging fleet. Many required has become apparent. ships are equipped with engines, communication facilities, and cargo handling gear that reflect Despite the generally salutary direction of technologies of the 1960s. This condition causes reform, the Department of Marine Transport low productivity, reduces asset reliability, and continues to carry out functions in the maritime forces individual ships to spend an increasing sector that the government should not perform. number of days in repair and maintenance yards These functions cannot be curtailed all at once; each year. The apparent need for the renewal of many of them must be phased out over a period of some part of the fleet, must be weighed against time. These functions include: worldwide demand for shipping and the degree to * In the economic policy field, tariff which this demand absorbs the present over- regulation, setting financial performance targets supply of ships in the world maritime market. The for enterprises, setting targets for productivity and government should resist the urge tofinance these capacity, establishing targets for freight transport renewals. The proposed intensification of joint to the Arctic and Far Eastern regions, and ventures with foreign partners is possibly the most managing the leasing of properties. effective immediate solution, in view of the Federation's and its carriers' current financial * In the field of social and personnel policy, constraints. employing and appointing senior managers to all A key impediment towards realizing such fleet enterprises, setting employment standards, wages, renewal is the unresponsiveness of national and benefits, and setting labor productivity and shipyards that specialize in ship repair and compensation standards. construction. The yards are caught between the * In the field of marketing and logistics need to generate hard currency income - which is management, developing fleet and industrial why they are increasingly devoting their repair capacity growth and new building plans, and building capacities to orders from foreign ship developing marketing plans for enterprises, setting owners - and the need to modernize. The port development and growth targets and consequences for Russian carriers are that there is developing port plans, attempting to coordinate not sufficient capacity for their orders, and the and optimize cargo carriage and cargo handling often antiquated installations and arrangements in between shipping companies and ports based on remaining local yards result in poor work, so they national objectives, and developing, implementing, have to resort to foreign yards. The government and controlling investment and growth policy, may wish to assist the process of restructuring and primarily through control of hard currency privatizing the shipyards by designating them as disbursements. eligible for assistance under the Privatization * Management of ancillary businesses, Implementation Assistance Project. particularly those set forth in the paragraph above. 150 Chapter 7 Inland Waterways decades. In the 1930s almost two-thirds of the river fleet carried relatively diverse general Russia's inland waterways system accounts for cargoes. River transport was not only only 3 percent of total domestic freight transport complementary but also an effectively competing in tkm. About 9,000 vessels in the inland mode to the land transport carriers, particularly to waterway fleet with an average age of 20 years, the railways. The Soviets constructed a an average capacity of 5,860 tons, and an average widespread canal system to provide east-west productivity of 90 ton-km per ton per vessel-day connections between many of the country's main according to EBRD consultants, sailing only 180 rivers, which generally have a north-south days a year for a total of 850 billion tkm. By orientation, allowing river transport to serve a comparison, the total tkm transported by river large number of urban areas and industrial transport in Russia in 1991 was only 195 billion. regions. Starting in the 1960s, however, the mix About 35 percent of the vessels are self- of cargoes transported on Russia's rivers and propelled. The self-propelled segment of the fleet canals changed. By 1991, more than 80 percent of performed 60 percent of the overall river freight the tonnage deployed was used to transport task. The system is expensive to operate because construction materials, generally gravel and sand, self-propelled vessels must remain idle while its for relatively short distances. The average length cargo is loaded and unloaded. More efficient and of haul in river transport has been less than 400 less costly barging arrangements, wherein the km since 1986. Sand and gravel for construction powered vessel (the most capital intensive) is kept account for 81 percent of total tonnage carried on moving pulling barges that can be dropped off for inland waterways. Timber, oil, and coal together loading and unloading, have become common add another 15 percent (or about 100 million practice in Western Europe and North America. tons). Nine other commodities comprise the remaining 4 percent of the traffic (exhibit 7.14). The decision to build so many self-propelled ships appears to have been related to the fact that According to EBRD economic forecasts, activity most of the river ports have adjacent shipbuilding for the primary user of sand and gravel - the yards, not to reasons related to operating costs, construction industry - is likely to continue to speed of delivery, or economies of scale. Keeping decline over the next 3 to 5 years. Based on the yards working on expensive vessels was more experience in other economies, it is safe to say pressing than the need to maximize river transport that even as the economy recovers, traffic is likely earnings. Moreover, since river carriers each had to lag behind GDP growth for some time to come. a monopoly on local traffic within about a 100- mile radius, it was always possible to earn a profit on the transport of local construction materials. In Exhibit 7.14 Inland Water Transport any case, the total fleet-invested capital increased Tonnage, 1990 by more than three times in the last fifteen years, creating a tremendous over-capacity of river Millions Percent transport vessels. Commodity of Tons of Total Since the combined carrying capacity of the Sand and gravel 542.0 81.0 river fleet exceeds current demand by substantial margins, the further decline in river transport Timber 50.7 7.6 demand projected in the near term is likely to Oil 34.0 5.1 expand excess capacity. There is no notable Coa 17.2 2.6 participation of foreign carriers in Russia's river transport system. All others 25.1 3.7 Total 669.0 100.0 Investments in new river transport assets will be difficult to justify because demand for such Source: MOT. transport has changed considerably over the past 151 Chapter 7 7he River-Sea Fleet. About 500 vessels engage other ancillary services were combined under the in river-sea operations, a specialized form of newly formed concern Rosrechflot, whose inland waterway transport performed by the same objective is to rationalize and promote river enterprises that engage in inland waterway transport in Russia. Given the sheer number and transport River-sea transport tends to be more diversity of entities under its umbrella, there can profitable than conventional inland waterway be little hope that Rosrechflot will succeed in transport because of the lengths of haul and the achieving such objectives. Different strategies are fact that vessels can often be redeployed in the required for carriers, ports, yards, and dredging winter season away from the frozen rivers of companies. At present there are still many binding Russia's North. organizational and operational links between all By 1995, it is expected that almost half of these entities that impede required system reforms. Russia's river-sea fleet will be written off. Current Yards own most river craft, and river transport MOT plans expect to replace about 45 to 50 of the companies are responsible for the operation of 237 vessels to be retired by 1996. MOT hopes to riverine ports. obtain donor financing of US$200 million to finance the purchase of imported vessels. Another Unlike ocean and cabotage carriers, for whom 52 vessels are expected to be replaced by domestic freight tariffs are still nominally fixed by the manufacturers by 1996. The 1993 federal central authorities, river transport operators have investment budget includes Rbl4.6 billion for been given complete freedom in rate setting. Only investment in the river fleet. Given the current in the eastern part of the Federation do restrictions excess of river vessels, it would seem that many still apply because there are only a few companies of these orders are unnecessary. active and they often enjoy monopoly status. Following the demise of the Ministry of River River freight rates have increased 20-fold since Transport, all river carriers, ports, shipyards, and early 1992, largely because of rising fuel prices. iBaking on Russia's Expertise in River-Sea Transpot: Two Companies:'Set: Directions Several Russian niver transport operators have developed far-flung servite networks that extend beyond inland waterways.s- They carry; diverse cargoes between upcountry origins and destinations along the Arctic and Pacific Ocean rirns, Moreo importantly, they engage in foreign trade with countries throughout thel: Baltic region,:::in Western tEurope,the ::: Mediterranean, and as far as West Africa. The vessels in these trades are of standard design in the 1,500 to 4,000 dwt range; they are versatile and can carry different types: of cargo sirmultaneously. Of the river companics engaged in international trade, the more irportant ones include the North Western Shipp;ng Company and the Volgotanker Riverl.. Shippign Company, which have different organizations, service bases, and corporate strategies. North Western is ai diversified carer with ai fleet of over 250 vessels and a domestic service network that extends over i10,000 klm of waterways beyond its operating Center in St. Petersburg. In 1992, the company's Qeet carried 47 illionti tons of cargo, of which six million tons were coming from or were destined for 22 foreign countrie. The technologies applied by North Western have attained so much intermational repute that orders are increasingly placed by foreign: ; 0 ;; operators for ;ships of the same typef as tNorthX Western's, fCompany ma nagement has Xdecidotl to 'diversify' into designdog 4ivOniN and building river-sea vessels. Passenger transport with special tonnage is another facetd of the company's business agenda. Volgotanker, in contrast, is a specialized carrier with a fleet of 90 Sspecial-purpose vessels. The company carries around 26 million tons of crude oil and petrolcum products annually along the Russian inla'nd waterways - frompthelCasian Sea. to the WArctic islands - and to destinations all over Western Europe. she company's trading patterns have changed drastically in recent years. In the late 1980s about 30 percent of its business was done with foreign charterers, which: increased to over 90 percent in 1992. Volgotanker is a shareholder in the Uralsf Croup, Russia's: biggest crude exporter... 152 Chapter 7 Apart from inadequate technologies and the * Stripping MOT of the authority to appoint growing age of the river fleet, low productivity of the president and senior management of all river river ports is another factor that renders the shipping companies. system's performance suboptimal. On average, * Restructuring the river shipping companies individual river craft spend annually about 60 to eliminate any vestige of their former role as percent of the time in ports waiting to be loaded holding companies, which included responsibility or unloaded. Inefficient port management for the welfare and business coordination of all organizations, pervasive limitations of cargo the enterprises. handling and storage facilities, and poor physical and operational connections with other transport Near-tern Recommendatons modes are responsible, plus the common practice in all Russian ports to transfer cargo directly from Corporatize, cut managerial links with the ship to or from rail wagons. Ports were designed government and put all maritime and river around this management principle, which implies carriers on a commercial footing. All existing narrow aprons and limited availability of national water transport carriers-ocean, cabotage, warehousing space. and river--should be put on a commercial footing and corporatized. Integral to this process should A major factor contributing to the high be a complete severance of managerial links with overheads and inefficiencies is excessive staffing the government, whose role should be limited to levels. Most of the companies have far too many ensuring that seaworthiness standards are met and non-essential staff on shore. East European maintained. Carriers should be free to develop and carriers which in similar conditions reduced their market services in line with their own corporate payrolls by up to 65 percent as one of their first strategies, which should extend to freedom to steps in corporate restructuring. Like ports, scrap obsolete vessels, to refurbish existing assets, Russian shipping companies were burdened after acquiring new tonnage, or to charter in foreign- the FSU breakup with a colossal variety of other owned ships. They should also be entitled to fix activities, assets, and social obligations. Before service charges in line with appropriate accounting becoming dissociated from ports, some of Russian standards and at levels that ensure full coverage of carriers had to look after 50,000 or more their operating cost, adequate asset depreciation, employees and their families. Shipyards, entities and sufficient funds to meet all overheads. responsible for dredging and navigational aids, Whether these overheads should continue to and a multitude of other types of service and include social infrastructure and productive assets infrastructure were part of their responsibilities. for their employees should be left at the discretion The most efficient decision would be to separate of the companies' management. the shipping companies from all non-transport- essential obligations and privatize them as soon as Permit carriers - in appropriate situations - to possible. diversify into related services such as freight forwarding, trucking and warehousing. In many Despite the progress to date, changes must be situations throughout the world, it is not unusual made to achieve a structure that will effectively for merchant marine carriers to diversify into promote a private, competitive, efficient river land-side value-added services, such as freight shipping industry. These include: forwarding, terminal operations, warehousing, and trucking. Given the historic role of Russian * Eliminating the monopoly of each port to shipping concerns as monopoly owners and serve local customers within a 100 mile radius of operators of ports, however, their participation in each port. such activities should be strictly limited to * Promoting competition among river carriers. situations where effective independent competition * Phasing out the responsibility of the river exists. The fact that a few of the principal Russian shipping companies for the social welfare of their maritime carriers have already begun to engage in employees. such activities on a limited basis indicates their 153 Chapter 7 interest. It is in the government's interest to participates in official seatrade conferences. ensure that their participation takes place within a Where cargo sharing arrangements exist, they are framework of competition and open access for all based on voluntary agreements. These policies are carriers to port facilities. sound and should be left in place. The majority of tonnage under Russian flag Medium-term Recommendations competes with foreign carriers on a cost and quality of service basis under unrestricted Deregulate river and maritime transport: abolish conditions. Similar behavior by the FSU carriers tariff regulation except in cases of monopoly or during the 1970s and 1980s caused much where subsidies are necessary, ease entry and exit consternation among western governments. restrictions. The basic policy conditions for the However since then most of these governments development of adequate water transport services have adopted a policy of open competition in through national carriers are transparency and ease seatrade. Few of their carriers remain active in of entry and exit. All tariff regulations and central conferences. The benefits for trade have been fixing of freight charges should be abolished. substantial. Thus an international climate has Exceptions should apply for situations where developed in which unrestricted competition and monopolies prevail, or in cases where the cooperation among carriers prosper. The previous provision of shipping services on the basis of antagonism versus the Russian carriers has charges that cover all fixed and variable vessel disappeared, and effective partnerships between cost would result in negative social impacts. The them and many foreign carriers are on the latter case relates to services in the Arctic Ocean increase. and the northern end of the country's Pacific rim. The best solution for these situations is to tender The only foreseeable way to create transport for the provision of service, to select a carrier competition is to promote competition among the through competitive bidding, and to conclude a several river shipping lines, the several maritime long-term service contract with the successful shipping lines, and Russian and nearby foreign bidder. The contract should include fixed service ports. Competition depends in part on the ability charges in line with the government's social to market the services offered, but current Russian objectives, and indexed allowances - effectively performance adversely influences business subsidies - to cover the difference between the development. Seeking foreign partnerships in an fixed charges and the actual cost of providing and effort to improve operations, to secure needed operating vessel assets. assistance in major investment programs, and to attract long-term business is a low-cost alternative. Let the marketplace allocate maritime capacity Port and shipping line management to develop - foster development of transport competition by contacts and pursue this line of approach should promoting competition among the several river be encouraged and supported by the government. shipping lines, the several maritime shipping lines, and Russian and nearby foreign ports. The debate Notes over what is the right policy decisions about the right to carry Russian waterborne cargoes or to 1. Sea transport accounted for nearly 81 percent what extent carriers should provide services with of Russia's international trade in 1991, excluding their own or chartered tonnage should be left to railway and pipeline shipments/deliveries (Russian the marketplace. Continuing the Soviet tradition, Federation Transport and Communications 1992). the government is not a proponent of the international Liner Code of Conduct, which 2. EBRD, Waterborne Transport Survey: Russian provides for a 40-40 percent split of the freight Federation, Draft Final report, July 1992, exchanged between two trading nations, with the NEDECO/HASKONING. p 4-34. remaining 20 percent left to cross traders. With the exception of the Baltic-Australia service by the 3. Constantine Michalopoulos and David Tarr, Baltic Shipping Company, no Russian carrier "Energizing Trade of the States of the Former 154 Chapter 7 USSR," Finance & Development (Vol. 30, No. Economic Commission for Latin America and the 1), March 1993, pp 22-25. See also Caribbean, 1992), pp 8-9. Michalopoulos and Tarr, Trade and Payments Arrangements for States of the Former USSR 9. Transport and Communications Division of the (Washington DC: The World Bank, September Economic Commission for Latin America and the 1992). Caribbean, 7he Restructuring of Public-Sector Enterprises: 7he Case of Latin American and 4. T. Korotkova, A. Krusiyan, and S. Alkhimov, Caribbean Ports (Santiago, Chile: United Nations "Exporters Facing an Uphill Climb," Commersant Economic Commission for Latin America and the (19 January 1993), pp 14-15. Caribbean, 1992), pp 13-14. 5. T. Korotkova, A. Krusiyan, and S. Alkhimov, 10. There have already been experiments with "Exporters Facing an Uphill Climb," Commersant providing different services through third parties (19 January 1993), pp 14-15. in Russian ports, and some have turned out to be very satisfactory. For instance, the Port of 6. MOT data, provided to World Bank mission, Vladivostok has contracted ten enterprises, some November 1992. of which are cooperatives, that manage different port services under leasing arrangements. The 7. Yevgeniy Solomenko, "The Petersburg lease contracts are for fixed periods and oblige Maritime Port on the Eve of a Strike," Izvestiya these third parties to operate and maintain the (23 February 1993), p 4, translated as "St. specific facilities during that time, subject to Petersburg Seaport Workers Form Strike accepted productivity levels. In return the lessees Committee," Central Eurasia (FBIS-USR-93-027) have the right to establish and collect service 10 March 1993, pp 55-56. charges within contractually agreed ceilings. These arrangements have turned out to be 8. Transport and Communications Division of the mutually beneficial to lessor and lessees, and the Economic Commission for Latin America and the port's user community has been generally happy Caribbean, The Restructuring of Public-Sector with the types and quality of service that are being Enterprises: The Case of Latin American and offered. Vladivostok's model could be easily Caribbean Ports (Santiago, Chile: United Nations applied in other Russian ports. 155 8 Airlines and Civil Aviation Air transport traditionally has played an extremely 3,600 cities and towns of the Soviet Union. Each significant role in passenger transport within regional Directorate of Civil Aviation conducted Russia and other FSU countries. Air transport airline operations according to Aeroflot's all- represented 37 percent of all intercity passenger Union schedule and operated the airports and air traffic in 1990, a staggeringly high proportion traffic control (ATC) systems within their regions compared to economies in the West. In the United (exhibit 8.2). Each airport was organized as a States, for example, only about 17 percent of hierarchial managerial and separate cost center intercity travel is by air. The high dependence on with the airport head responsible for all activities. airline travel in Russia results from a combination Each airport's revenues included ticket revenues of factors: (a) the vast distances of the country, from enplaned passengers at that airport, revenues (b) exceedingly low air fares, and (c) the relative from chartered aircraft and crop dustings, landing scarcity of intercity bus and automobile fees and ATC charges. On the expense side, the transportation. administrative costs of running an airport were co- More than 138 million passengers were mingled with those of airline and ATC operations. transported by air throughout the Soviet Union in 1990, making Aeroflot, the umbrella holding Aeroflot Soviet Airlines, the international company for all airline operations in the FSU, the enterprise within Aeroflot, was created and world's largest airline. Russia and the United incorporated in 1971, with headquarters at States together accounted for approximately 46 Sheremetevo, Moscow's international airport. percent of the world's total air traffic (exhibit Aeroflot Soviet Airlines is the designated carrier 8.1). in all 113 bilateral agreements covering international service and operates into more than Organized as a vertically-integrated, multi- 70 foreign airports. Over sixty foreign carriers fly enterprise, monopolistic holding company into Russian airports. Prior to the breakup of the reporting to the Ministry of Civil Aviation, FSU, Aeroflot's international network covered Aeroflot, under the USSR, provided service 134 locations in 102 countries. The need to according to an all-Union schedule organized and maintain centralized control over the earnings and controlled from Moscow but operated as a series expenses in foreign currencies and to ensure that of regional directorates at major city airports Aeroflot complied with International Civil within the country. Airline operations were strictly Aviation Organization (ICAO) regulations divided between domestic and international probably explains why it was organized as a service, with separate organizations and accounts separate entity along the lines of its international for each. competitors. Domestic service included both scheduled and Aside from airline operations, Aeroflot was also chartered passenger and freight service among responsible for air freight service, development 157 Chapter 8 Exhibit 8.1 World's Major Airlines, 1990 Scheduled Passengrgs Cwrhod Tn Wrdd Al [TWAI Brlth Arw .y J.p AH _A= Al Nl.on Akzr C.nth.nt.l AWbin. Norlhw-t ANin.. USAir Unit.d AjAn.. Dolt. Air Lin.. A-e-icn AIrline- AsrotElol * _. I I -- -----+-------- --_ 0 10.000 20,000 30,000 40.000 50,000 50,000 70,000 90,000 90.000 Source: LATA World Air Trnnspot Stutistlcs. 1991. p. 28. and operation of airports, and development and applied to MOT for authority to operate as operation of the air traffic control system. independent airline enterprises under the new Aeroflot owned more than 8,000 aircraft for policies in Russia. More than 174 individual domestic service, of which about 60 percent were applications have been received from emerging active, including about 1,500 commercial jets, as domestic airlines. At the same time, Aeroflot tried well as small aircraft, crop dusters and to coordinate the operations of these new airlines, helicopters.' including those in other republics, so as to continue to operate as an all-union airline Impact of the Breakup on Aeroflot. Following according to the old Aeroflot routes and schedule. the breakup of the Soviet Union, aircraft, airports, and air traffic control facilities were divided As in the past, revenues and cost records among republics according to each aircraft's continue to be kept for each airport. A central geographic location. Aeroflot's fleet was divided accounting branch within Aeroflot distributes among the republics according to their home base revenues and clears accounts among the airline airport, taking into account traffic demand and enterprises. International flights were maintained operating schedules. The republics subsequently by requiring the newly formed airlines to fly the set about organizing independent airlines. Aeroflot flag and conduct operations under the control of Aeroflot Soviet International, the single In addition, many of the regional departments designated carrier in bilateral negotiations. To within Russia formed joint stock companies and help coordinate this effort, the CIS formed an 158 Chapter 8 Exhibit 8.2 Regional Aeroflot Administrative Departments circa 1990 IBRD 25152 a A R C T I C OCEA NN Ki () MOSCOW Syko (1,2.3 & 3 1) ( O N G O ,no9rod Q. (15g AR I R A Nbd,~, (20) 5.0 U S S I A N AZEFBAUA soh) TAAJKISTAN *N0> 0D P R *K/ t (101~~~~~~~~~~~~~~~~~~~~~1) \ 4 AFGHANISLAMIA>C H I N Ado)23( 3) I R A N~~~~~~~~~~~~~~~~~~~~~~~DP JAPAN( SEPTEMBER 1993 Russian Federation Adrministrative Center Other Republics Administrative Center 1. Central Department of International Moscow (Sheremetevo) 17. Ukrainakoe Kiev Air Services 18. Belorusskoe Minsk 2. Moscow Transport Department Moscow (Vnukovo) 19. Moldavskoe Kishinev 3. Department of Central Region Moscow (Bykovo) 20. Georgian Tblisi 4. Northern St. Petersburg 21. Armenian Erevan 5. Arkhangelskoe Arkhangelsk 22. Azerbaijani Baku 6. Komi Syktykvar 23. Kazakhskoe Alma-Ata 7. Uralskoe Yekaterinburg 24. Turkmenskoe Ashkhabad S. Privoijskoe Kuibyshev 25. Uzbekskoe Tashkent 9. Northern Caucausus Rostov 26. Kyrgyzskoe Bishkek 10. Tyumenskoe Tyumen 27. Tajikskoe Dushanbe 11. West Siberian Novosibirsk 12. Krasnoyarskoe Krasnoyarsk Previously USSR 13. East Siberian Irkutsk 28. Lithuanian Vilnius 14. Yakutskoe Yakutsk 29. Latvian Riga 15. Magadanskoe Magadan 30. Estonian Tallinn 16. Far Eastern Khabarovsk Miscellaneous 31. Special division for Moscow (Vnukovo) governmental and VIP flights Source: Aeroflot. 159 Chapter 8 Interstate Aviation Committee to develop unified impact of cost increases through fare hikes. procedures and requirements regarding airspace Although prices have been raised, the increases management and control, airline certification, have driven away enormous numbers of aircraft, airways, and aircraft accidents. passengers, despite the fact that price increases Air traffic levels in Russia and the FSU as a have lagged far behind cost increases. whole were extraordinarily high, largely due to Average revenue per pass-km was about 0.026 the fact that Soviet domestic air tariffs were the rubles (about 3 kopeks) in 1991, or about Rb42 lowest in the worldfor many years. Soviet citizens per trip. Aeroflot fares were traditionally low and were free to travel anywhere in the Soviet Union, were related to average weekly pay to make air and air transport became the most popular means travel easily affordable. An average ticket price in of transport in the USSR. In 1990 Aeroflot carried February 1992 was about Rb250 (the equivalent of about 133 million passengers on its domestic US$2.50 at the then-current exchange rate of operations, roughly 86 million in Russia, and RblOO to the dollar). Fares have been raised another 5 million internationally (this compares to numerous times since then, but overall cover only about 1.2 billion passengers world wide for all air about 70 percent of costs according to Aeroflot in travel). November 1992. At that time, Aeroflot also estimated that if fuel were raised to world prices, Airline traffic declined about 5 percent in 1991, passenger fares would have to be raised 3.4 times and another 27 percent in 1992. International to cover operating costs and 7.5 times to cover all flights suffered a substantial reduction in tourist costs, including capital costs. volume among the republics of the former USSR According to published results, Aeroflot and other socialist countries because of the recorded a profit of Rb3O million in 1991 after transition to mutual accounts in convertible paying income taxes of Rb2.4 billion on operating currency. Domestically, air travel declined as results of Rb2.5 billion (exhibits 8.3, 8.4, and fares were increased to cover rising fuel costs and 8.5). Since then, however, margins are political upheaval altered traditional domestic disappearing and losses are beginning to occur travel plans. In 1991 Aeroflot carried only 82 among many of Aeroflot's individual enterprises. million passengers in Russia, a drop of about 5 percent over 1990 levels. Load factors per flight Subsidies. In 1992 Russia's federal budget also dropped from 89 percent to 85 percent predicted airline expenditures would exceed despite cancellation of many flights. Traffic fell revenues by Rbl8.6 billion and provision was even further to 62.6 million in 1992, with load made to include airline subsidies for price, fuel factors slipping below 80 percent. Total domestic and investment. A total of Rb34.8 billion was pass-km flown in Russia were about 133 billion in provided to subsidize operating losses and Rbl7.8 1991 and 117.6 billion in 1992, about 18 percent million to finance investments. Of this total, Rbl5 of total U.S. airline performance. The average trip billion was for fuel subsidies. The government has length in Russia in 1992 was about 1,878 taken a decision not to subsidize airline passenger kilometers. service after January 1, 1993 and has granted airlines full tariff freedom, provided profits do not Efforts to maintain Aeroflot's status quo exceed 20 percent. continue to be increasingly undercut by financial and general economic difficulties related to the In view of the declining financial situation and breakup of the FSU. Besides the declining growing levels of subsidy in the airline sector, the passenger and freight traffic, increased fuel costs, government also decided to subsidize passengers wage raises and disruption in the supply of where necessary for social purposes. The 1993 aircraft and spares resulting from trade problems federal budget includes Rb25 billion for subsidies have added to Aeroflot's difficulties. The financial for air transport to northern territories. These impact of these factors is immense. Aside from funds - the need for which is expected to triple in the loss of revenue the decline in volume, 1993 - are to be given to the local governments, Aeroflot has not been able to recover the full however, rather than to the airlines. 160 Chapter 8 Exhibit 8.3 Aeroflot Profit and Loss, 1988 to 1991 (Rb 000) Description 1991 1990 1989 1988 Revenues Scheduled services 3,928,938 1,353,068 1,133,888 979,210 Non-scheduled services - 60,941 56,519 11,000 Incidental revenues 242,944 543 652 17,409 Total operating revenues 4,171,882 1,414,552 1,191,059 1,007,619 Expenses Flight operations 778,245 204,033 193,298 166,930 Maintenance & overhaul 150,313 128,293 100,577 99,176 Depreciation & amortization 258,291 94,140 89,689 89,459 Station & other ground expenses 247,484 124,679 106,766 53,273 Passenger services 69,006 64,804 50,673 31,238 Ticketing, sales & promotion 7,218 4,616 4,580 7,000 General & administrative 67,383 38,046 29,432 18,882 Other operating expenses 124,858 251,001 116,064 2,427 Total operating expenses 1,702,798 909,612 691,079 468,385 Operating result 2,469,084 504,940 499,980 539,234 Non-operating Other non-operating items (104,428) (162,565) (141,829) Non-operating items (balance) (104,428) (162,565) (141,829) Profit or loss before income tax 2,469,084 400,512 337,415 397,405 [Income taxes] [2,438,961] [394,3321 [325,159] [392,567] Profit or loss after income tax 30,123 6,180 12,256 4,838 Source: Aeroflot Annual Report, 1991. The implicit subsidy stemming from the fact that to reduce service, or on the government to domestic oil is sold at far below world prices is, subsidize air transport. of course, far greater. Nonetheless, fuel is an increasing problem for the airline sector in Russia, The government is also being pressured to even at subsidized prices. According to ICAO support air infrastructure, and approximately figures, world scheduled airlines' share of fuel Rb37.9 billion has been included in the 1993 and oil in operating expenses was about 15 budget to purchase airplanes. MOT's original percent in 1990. By contrast, fuel now represents budget requested far higher levels of support for about 40 percent of all costs for Russian airlines investments and operating subsidies, including (it was 80 percent until a recent increase in US$430 million for acquisition of aviation engines wages). It is estimated that Russian airlines are and technology. Ultimately, some of this request paying approximately 25 percent of the market may be provided through directed state credits. price for fuel in early 1993.2 As fuel prices are Fiscal reform of the airline sector is necessary increased to world price levels, the percentage of but will depend upon restructuring of the sector, costs attributable to fuel is expected to increase petroleum pricing reforms, social safety net issues dramatically and put greater pressure on airlines and greater prudence in investment planning. 161 Chapter 8 Exhibit 8.4 Aeroflot Traffic Performance & Operational Results, 1991 (Domestic) Revenue Flights Unit 1991' 1990 '989 1988 Scheduled service (including all-cargo flights) Passengers carried thousands 81,879.5 132,766.7 127,300.3 120,797.80 Freight tons carried thousands 2,120.5 2,831.4 3,161.8 3,195.87 Pass-km flown millions 133,428.6 224,310.2 211,137.5 198,653.60 ASK millions 157,434.4 252,691.4 237,760.8 226,054.40 Passenger load factor percent 84.8 88.8 88.8 87.90 Tkm performed Passenger (including baggage) millions 12,008.6 20,187.9 19,002.4 17,878.82 Freight (including express) millions 1,567.8 2,141.3 2,279.3 2,374.34 Mail millions 298.3 511.0 521.2 486.64 Total millions 13,874.7 22,840.2 21,802.9 20,739.80 Available tkm millions 20,280.6 32,518.8 30,671.7 27,947.08 Weight load factor percent 68.4 70.2 70.4 74.20 a. Domestic flights include Russian Federation only. Source: Aeroflot Annual Report, 1991. Passengers Carried (millions) 140 120- 100 80 40- 20 - 4.2 4.7 4.9 3.8 1988 1989 1990 199l International 1 Domestic While the government's position to stop further These financial pressures are beginning to pricing subsidies will force some restructuring in undermine adherence to Aeroflot's integrated and of itself, there are some markets, such as operating schedule. The drastic drop in demand northern areas where air transport is the only has led to the cancellation of as many as 30 to 40 means of transport, where such policies cannot percent of flights. The disruption of fuel supplies prevail in the long run. The government has stranded planes throughout the system, played subsidization being provided to the northern havoc with operating timetables and occasionally territories might become productive if tied to a left regional managers with hundreds of distraught process through which air transport is provided passengers on their hands, sometimes for days. under competitive bid. The need to raise fares to cover costs has become 162 C-hapter 8 Exhibit 8.5 Aeroflot Traffic Performance & Operational Results, 1991 (International) Revenue Flights Unit 1991 1990 1989 1988 Scheduled Services (including all-cargo flights) Kilometers flown thousands 143,012.8 161,014.1 147,229.0 132,555.50 Aircraft departures number 53,525.0 62,053.0 56,201.0 53,573.00 Hours flown number 180,487.0 199,784.7 184,045.0 167,133.00 Passengers carried thousands 3,760.5 4,431.5 4,307.5 3,814.10 Freight tons carried thousands 53.9 69.1 68.0 64.21 Pass-km flown millions 15,569.2 17,863.6 16,590.1 14,480.60 ASK millions 22,558.2 25,388.4 23,028.0 20,796.40 Passenger load factor percent 69.0 70.4 72.0 69.60 Tkm performed Passengers (including baggage) millions 1,401.2 1,613.7 1,493.1 1,303.25 Freight (including express) millions 346.0 391.4 366.1 345.14 Mail millions 13.4 29.2 34.0 38.71 Total available millions 1,760.6 2,034.3 1,892.2 1,687.10 Tkm millions 3,816.6 2,997.8 2,701.4 2,459.05 Weight load factor percent 46.1 67.9 70.1 68.60 Charter Services Kilometers flown thousands 27,577.7 27,583.1 23,363.0 22,649.30 Aircraft departures number 9,825.0 12,648.0 10,797.0 10,721.00 Hours flown number 36,428.0 36,958.3 29,992 28,881.00 Passengers carried thousands 405.6 543.5 443.2 399.20 Freight tons carried thousands 35.2 30.2 25.8 28.72 Pass-km flown millions 1,436.2 1,672.4 1,246.9 1,094.80 ASK millions 2,495.4 2,512.7 1,927.8 1,698.20 Passenger load factor percent 57.6 66.6 64.7 68.50 Tkm performed Passengers (including baggage) millions 129.3 144.6 112.2 98.53 Freight (including express) millions 163.8 141.8 114.8 110.62 Mail millions 2.9 0.4 0.2 8.35 Total available millions 296.0 286.8 227.2 217.50 Tkm millions 838.3 516.4 451.2 435.97 Weight load factor percent 35.3 55.5 50.3 49.90 Source: Aeroflot Annual Report, 1991. SCHEDULED AND CHARTER Freight SERVICES Tonnes Passengers Carried carried (thousands) (thousands) CY) 0n 100 5000 - c so 98- 986 4000 94 , 92 3000 90 c 88 2000 [~fl~ 1000 1988 19891990 1991 1988 1989 1990 1991 163 Chapter 8 more important to each airline since it can no operation, flight safety, the quality of longer count on financial support from more transportation and passenger service. ' profitable sections of Aeroflot. The newly formed In line with the government's goal of de- airlines are increasingly expressing a desire for monopolizing air transport, the department of air independence from Aeroflot and particularly from transport is charged with, among other functions, Aeroflot's centralized control of accounting and promoting the establishment of independent operations. airlines within Russia. This effort is limited to creating competition within Russia by permitting Evolving Structure of the Aviation Sector the regional administrations to operate as individual "home base" airport cost centers (the The current organization of the civil aviation regional administrations) and other air enterprises sector in Russia is in flux. While Aeroflot remains and associations created as subsidiary ventures of the umbrella company for domestic and Aeroflot in the past to operate as self-sufficient international airline service, it is no longer a enterprises. To some degree the impetus for the regulator of civil aviation and a new authority has creation of these airlines stems from the desire of been created to own and operate Russia's ATC airport managements, particularly those with system. Separation of ownership and operation of sizeable fleets, to corporatize and form a joint airports from that of airlines is also a stated goal stock organization pursuant to new policies and of the government, but one that the government is laws in Russia. According to MOT, there are 174 apparently having difficulty trying to implement. registered non-state aviation companies, joint The government has not decided how the industry stock companies and other commercial structures should be structured, and Aeroflot itself seems to which operating licenses have been issues.4 bent on maintaining as much of the old system as possible on the grounds of avoiding disintegration At the same time that it is encouraging of the system. Nonetheless, the government has competition, the government recognizes that many stated that it wishes to cease subsidizing air travel of these new airline enterprises are losing money and permit development of a number of privatized and may never be self-sufficient as presently airlines to compete with each other in the constituted. Their changing circumstances are domestic market. causing the government to rethink the situation. In July of 1992, the director of the newly formed Air Regulation of Civil Aviation in the Department Transport Department indicated that the of Air Transport government would promote development of 30 competing airlines. In November 1992 the Aeroflot's previous role as the regulator of the Minister of Transport indicated that the civil aviation sector has been assumed by the government might favor the creation of only about Department of Air Transport in MOT. This four competing airlines within Russia and possibly department has about 400 employees and is even try to maintain operations under a single responsible for developing economic and airline. Despite these reservations, as of June structural policies for the aviation sector. The 1993 there were 174 airlines registered.5 department is trying to organize the The present number of domestic carriers is "denationalization and privatization of property unlikely to survive in the long term and the and technical facilities in stages on the basis of government's decision to cease subsidizing fuel or legal and economic regulators, with provision for ticket prices will probably hasten the bankruptcy appropriate flight safety." In this connection, of many of them. The government should stand by according to its director, the government is trying its decision not to subsidize fuel or ticket prices. to form new competitive structures based on Given the tremendous number of carriers now existing civil aviation enterprises, administrations, licensed to fly domestically, however, it may be and associations, to "operate as free entrepreneurs better to avoid many bankruptcies by facilitating with maximum economic independence and full the merger of many loss-making local airlines into responsibility for the results of economic a reasonable number of viable competitors. In 164 Chapter 8 setting policies that will affect the structure of the * The directors of each republic's Civil industry, the government needs to have a clear Aviation Administration. understanding of the number of competing 0 The director of MOT's Air Transport domestic airlines that could be self-sufficient given Department. realistic forecasts of demand. These same studies * The chairman of the new ATC organization, are also essential to assess the need for airports Rosaeronavigatsia. and airport upgrading. Unfortunately, there are * Commanders of the CIS Air Force and presumably a number of master plans and airport military representatives from other republics. expansion plans being undertaken on an ad hoc 0 Aeroflot's Director of Flight Operations. basis without reference to assessments of overall MAK has about 350 employees and its primary air traffic levels or in the absence of agreements function is to coordinate inter-republic issues on the legal and regulatory framework for the related to civil aviation including: (a) coordinating sector. CIS interests with respect to bilateral negotiations on landing rights; (b) aircraft certification; (c) If air travel is to be self-sufficient in Russia the licensing of airports, crews, and air traffic real price of air travel will be far greater than it controllers; (c) promulgation of civil aviation has been and the price relative to rail and flight standards; (d) management of airspace and automobile travel will undoubtedly increase. Such coordination of overflights; and (e) accident price increases will depress the demand for air investigations and other safety matters (exhibit travel, particularly at a time when (a) real wages 8.6). are not likely to increase for much of the There is no single right answer to the population, (b) unemployment levels may rise, structuring of the airline industry within Russia, and (c) the economy as a whole is not likely to but an effective solution would be to encourage all return to 1989/90 levels until well into the next entrants that wish to try to become self-sufficient century. At the same time, the air travel market to to ensure that they are permitted to compete in all and from other republics may decline further if markets and then allow mergers and put on a hard currency basis. Based on these consolidations to take place as the market factors, and taking into account the fact that air dictates. Whatever else, the government should travel levels were artificially high in the first take steps to ensure that at least several domestic place, it is highly unlikely that the air travel airlines are formed and that competition among market will reach 1990 levels for decades. A airlines is encouraged andfacilitated. Of course, consultant forecast estimated that the number of it should be clear that some minimal criteria for millions of revenue pass-km in the year 2015 assessing the fitness of potential entrants in the would be 144,280,6 which is less than the actual airline sector is advisable to protect consumers level of 159,519 million revenue pass-km in 1990. from unsafe airplanes or unfit companies. Entrants should be "fit", willing and able, which means CIS Interstate Aviation Committee. The newly they should be able to demonstrate they have the formed independent airlines in other republics financial capability , the managerial expertise and conduct international operations under the the proper compliance disposition to operate in a Aeroflot flag. According to Aeroflot, most of the safe manner and in the public's interest. Russia's new airline operators have no experience in air market is so large, even with the recent drastic commercial activity in air transport markets, are declines in traffic volume, that more than one economically insolvent, and possess practically no carrier can certainly be self-sufficient provided it legal competence in the field of international is permitted to do business on a freely competitive contractual relations. For this reason Aeroflot basis throughout the country. The experience of continues to direct their efforts through a new China may be of some relevance. China's coordinating body called the CIS Interstate domestic airline travel transports about 26 million Aviation Committee (MAK), which was created passengers annually, compared to the 62 million on December 30, 1991 in anticipation of the carried in Russia in 1992. Scores of new small breakup of the FSU. The council is composed of: Chinese airlines are now starting up, spurred on 165 Chapter 8 Exhibit 8.6 Inter-State Aviation Committee, 1991 A COUNCIL OF REPRESENTATIVE A E ShIyIV. A. ELAIONSECRETARIAT FO A l I~~~~~CAO AFFAIRS | CHAIRPERSON Dcryrnov Yu. P. LAnodin" T. G. |FIRST DEPUTY CHA91R!AN D EPUTY CHAIRMANJ i Tereshchenkr M. M. r t Efirrenko A. t n 020~~ ~ GEEA AAER l N'TEATNA AIR TRANS OP.T ShlENERAV A IARELATIONS DEVELOPMENT- OFI Rydie kor N. V. r t , Or. g rylov A. N. COMMON SERVICES FAIR NAVIGATION -SECRETARIAT _- COVMISSION LYefimov A. N. __a iMblshkivsky 1. Yef. INTERSTiATE AVIA71ON _REGISTER Sou!thka V. V. _ISCIEN7IFIC PROGRAMS Yermolay O0. K. Source: EBRD Aviation Sector Survey, Draft Final Report in part by a 1992 government decision to permit Aeroflot rights and obligations under inter- foreign investment in and cooperation with its governmental air transport agreements to a newly domestic carriers. With respect to airports, it organized company covering international should be understood that issues in terms of operations. The PCA performs about 90 percent numbers of airports or expanding capacity will be of Aeroflot's total international operations with a far less of an issue than how to rationalize the fleet of about 100 aircraft and 17,000 employees. sector's facilities and enterprises. To the extent The PCA structure is still a vertically integrated possible, such rationalization should be guided by corporation with respect to international the market-place and government investment and operations, however, with the following list of subsidization kept to a minimum. Airports should enterprises. be supported by concessions for shops, parking, * Sheremetevo-2 International Airport and revenuesfor landingfees, and airlines should * Sheremetevo Aircraft Maintenance and be supported by passenger and freight revenues. Engineering Center * Flight Operations international Airlines * Ground Handling and Other Service * International Commercial Department Production and Commercial Association. In July * Russian International Airlines 1991, international airline operations were * Moscow Airline grouped together under a united enterprise called * Golden Star Airline the Production and Commercial Association * Russian Vityaz Airline (PCA) or Aeroflot-Soviet Airlines (exhibit 8.7). 0 The Inter-regional Agency of International The main objective of PCA was to ensure the Sales Services (called "Russia") preservation and transfer of the former all-Union * The International Accounting Center 166 Chapter 8 Exhibit 8.7 Aeroflot - Soviet Airlines DEPUTY CWRIRAU DIJ RECTOR mC DIRECTOR DIRrECTOD DIRECTOR DIRECTDR DIRECTOR OF THE PORP, DfPLITY CHIEF ENGINEERING T TRAFFIC EITERMNAL. ECON. LEGJ PrRDUCLTIoN ' DEPUTY FINArCE ESEOJYIW, DIRECTOR FRIGHzT . Ł r AurEN. ! SErSICES RELATIONS o ICSC SERVICES DEVELOPMrENT DIRECTOR E :.-XECUT... . .V.. IN E.O FL.G. ... AJkN. .C'S L _::.s .. ;. OPERATION& ANCE ALAUOMATION OMPCA CZ IWMR~~~~~~~~~~~~~~~~~~~~~~~N!NNATTAID OF lNTRNAnIoNAL l DIrECTOR PWTERNATII)NAL. COMMERCIAl. AIr *EPrdn l _ORGANIZATIONS DEPARrMENT | OPERAnohS | pta | nE^FFZc | | CorJr^ERclAL l -|DIRECTOR PERSONNEL I| FIANCIAL TARIFFS P rANNIN Orl MSION | | SERVICES h I *ERtCE m n cOGMrCIAL s|uc I DIRECTOR RELATIONS E ATE WrTH AEGIONAL OMSIONS r LEGAL JOINT OPERATIONS PAJNER | ErVrcS A AIRUhES I EUROPE FUEL ANkD | AFFAIRS | S0 veJR SERVAFŁSVICE|S ERVICEs 11 -| VnrH FDREASOH-AT CAE | | | LJ l -| (lzlEr~~~~~~~~~~~~~~~SI DIROOO I LiECTR.cS| SAFY TIONS l| DIRECTOR RELATION AIEDIMAJL ~~~~~WITTY FOREIGN ARC CYDJA CESIVICES N~~~~~ARLINES REPRFSENTATWESAMILEAS CIIIEF PROTOROL CONSTRUCTION DIRtECTOR HELATIONS WITH AEROFLOT __ _ _ _ _ _ _ _ RnREr"ESENATAES ArROAD |CENRAL INTERNA. CENSRAL CENTREh I INTERNII TIONAL ADRERTI S T L A - OADACCOUTNG Source: Aeroflot, Annual Report 1991 * The Central Advertising and Information roughly 72 percent of Aeroflot's international Agency business was generated in Russia. As Aeroflot * The Center of Automation of Commercial Soviet International is the only Russian carrier Activities engaged in international air transport, it is not * The Center of External Aviation Services. clear how the government intends to ensure that The government has indicated its intention to privatization of its operations would not allow its permit Aeroflot Soviet International to privatize in new owners to abuse this monopoly. Although about three years. To this end Aeroflot Soviet there are 60 foreign carriers serving Russia, these International has already formed a joint stock carriers have neither the same access to domestic company and been renamed Aeroflot Russian passengers nor the scheduling frequency of International Airlines in anticipation of further Aeroflot. Moreover, Aeroflot owns the divorce from other CIS airlines, and because international airport and its cargo handling 167 Chapter 8 services at that airport. It is not clear whether the basis as Air Russia. MOT's proposed 1993-1995 privatization will be at the airline level or at the budget includes US$750 million to support Air PCA level. Aeroflot has requested assistance to Russia's equipment requirements (exhibit 8.8). If develop a strategic plan and restructure Aeroflot this airline is to be privatized, it should be able to Soviet International under IBRD's proposed pay for its own aircraft. Privatization Implementation Assistance Project, but to date the government has not formally IfAeroflot'sRussian international airline service endorsed the request. is privatized as expected, CIS airlines will no longer be able to fly under the Aeroflot symbol. If the government goes forward with The process of segmenting Aeroflot's international privatization, it should be encouraged to split up operations is likely to be long and difficult since it the PCA holding company, particularly with a may invoke disputes over ownership of foreign- view toward separating ownership of the airport ownedfacilities as well as landing rights. Current from the airline, and permitting the formation of landing right agreements in Ukraine, for example, competing cargo handling companies. Instead, the give foreign carriers the right to land in Ukraine government has agreed to permit Aeroflot forfive years, with payment going to Aeroflot in International to retain ownership of Sheremetevo Moscow. so that Aeroflot's earnings can finance improvements being made there. The joint venture Separation of Airpotis from Airlines to rehabilitate the airport calls for a German company to invest DM800 million worth of When Aeroflot owned and operated the airports improvements, of which DM45 million has been from which its planes flew, each large airport was spent. organized as a cost center. As the regional Aeroflots have chosen to corporatize and In addition to the above subsidiaries, according eventually privatize, a major problem is that the to Aeroflot's 1991 Annual Report, "about 20 joint airport assets are still co-mingled with the airplane ventures have been set up in cooperation with assets under one administration. The Russian air foreign partners engaged in various forms of transport system badly needs to separate activities to improve the services rendered to ownership and operation of its airports from its Aeroflot services."' Unfortunately, several of airlines. The government has stated that it favors these joint ventures are also counter-productive to such a separation, but is already finding it difficult the notion of demonopolization and fostering of to accomplish. In some cases, joint ventures to competition and new market relations. For upgrade airports have already been entered into example, the new Russian airline, Air Russia, is and the government does not want to assume the a subsidiary of Aeroflot Soviet International. As burden of financing the improvements. such, it seems unlikely that it will compete head- to-head with Aeroflot Soviet International. As Airports and the ATC Authority. Prior to the presently structured, it appears to be a means of breakup of the Soviet Union, ATC and getting British Airways to contribute western management of airspace over the FSU involved aircraft and capital for airport improvements in both the Ministry of Defense and the Ministry of exchange for shares in a new airline that will own Civil Aviation; the civil portion was managed by Domodedovo Airport. Since there are plans to Aeroflot. Since the breakup, the government has transform Domodedovo airport into an separated management of the use of air space international airport, perhaps British Airways from that of airline operations by establishing a hopes to be able to fly international flights into new authority to own and operate an ATC system. Domodedovo and provide transfer service to The new authority, the Commission for Airspace domestic destinations in Russia. and Air Traffic Management of the government of the Russian Federation (Rosaeronavigatsia) was The government should ensure that other established February 27, 1992, by Presidential carriers have access to Domodedovo on the same decree. 168 Chapter 8 Exhibit 8.8 Budget Request for Financing Federal (Interstate) Air Transportation 1993 1994 1995 Subtotal Total Volume of appropriationsforfinancing the 69,900 83,000 92,000 244,900 current year's installment Capital investments 25,300 35,000 40,000 100,300 Subsidies for current expenses 44,600 48,000 52,000 144,600 ................................................................................................................................................................................................................ Substantiation of capital investments Construction 7,100 12,000 16,000 35,100 Sochi Air Terminal Complex 622 622 Domodedovo Airport 99 99 Vnukovo Airport 906 1,700 2,606 Anadyr Airport 57 650 700 1,407 Syktyvkar Airport 282 850 730 1,862 Vorkuta Airport 219 720 1,200 2,139 Runways, repair facilities, and other air 4,915 8,080 13,370 26,365 transportation systems ................................................................................................................................................................................................................ Aviation technology 18,200 23,000 24,000 65,200 Airplanes IL-96-300 2,000 4,000 5,000 11,000 TU-204 1,800 3,600 3,600 9,000 4,000 4,000 4,00 12,000 IIL-86 2,500 3,000 3,00 8,500 TU-154M 1,600 800 800 3,200 YaK-42 Helicopters 900 600 600 2,100 Jet engines 3,100 2,000 2,000 7,100 Air navigation equipment 2,300 5,000 6,000 13,300 In addition, convertible currency funds in $430 $510 $510 $1,450 U.S. dollars for the acquisition of imported aviation technology & spare parts Source: MOT. Aviation Investment * ATC systems. The government of the Russian Federation is the * Repowering aircraft with Western- target of many pressures to invest in the various manufactured engines. elements of the aviation system. Four investments * Airports. in particular are important: * Computer reservation systems. 169 Chapter 8 The ATC system operated by Rosaeronavigatsia main airports in St. Petersburg, Ulianovsk, and is reported to be inadequate to handle the density Mineralnye Vody - are adequately covered in that of air traffic in Russia. Russia's ATC system they are categorized as ICAO II. Of Russia's 130 manages 100,000 flights per day, including those national and approximately 3,000 local or regional of 500 foreign airlines. Air traffic controllers in airports, only 18 are categorized as ICAO Moscow alone deal with over 2,500 flights per Category I airports but nearly 500 are equipped day.' Some critics point to the poor ATC as one with technical systems and means for the support of the reasons why Russia's air safety record is of flights. ATC in the airspace beyond airports is not particularly good although many accidents are performed by 68 regional and 62 auxiliary related to other causes, such as the increasing age regional centers of the Consolidated System of of Soviet aircraft or pilot error. In fact, Russia's MOT. MOT is concerned that the remaining ATC air safety record had improved substantially until regions and airports of Russia are equipped with relatively recently (exhibit 8.9). obsolete equipment not responding to the demands Officials also say that Russia's ATC system is of ICAO standards. obsolete in some airports and that not enough Actually, Russia's figures are not dissimilar to airports are covered. According to MOT, the six the United States, where only 27 airports averaged international airports in Russia - Sheremetevo, more than 275 commercial flights per day and Domodedovo, and Vnukovo in Moscow, and the thus were in need of the most sophisticated ATC Exhibit 8.9 Accident Rates (Passenger Service) Incidence per 100,000 flying hours 0.2 0 4'1 1981 1982 1983 1984 1986 1986 1987 1988 1989 1990 Year - ICAO. except for FSU - Former Sovlet Union * USA Source: Business In the Ex-USSR, February 1992, p.38. 170 Chapter 8 Exhibit 8.10 New Airline Routes over Russia IBRD 25153 RUSSIAN C,k- - - FERERATION - PeFEREATot Ch-eklyu ALASKA Bejifuogro Elunsu*Ocon |< SGOeflSed e otsI --0 .........e,o - b.- A-mhŹ7~-Z-- D.P. R. of 01 ~ pto--k k KOREAo iRE. 5, Z KOREA Japo-n C r_a, JAPAN 44. n ot aii ow being blown on tost flighots) - To~~~~~~o~~~f Ontis C)c~~~~~~~~~~~~, ~ Suggested new routes SEPIEMBER 1993 Source: Guy Norris, 'North by Northwest,' Flight International (2-8 December 1992), p. 38 systems. Airport volume is obviously related to great circle routes over Russia and reduce flying the population density of surrounding areas, and times. it is not necessary to invest in costly ATC There is also demand for air carriers flying equipment in places where there are only a few from Alaska to Japan to fly over rather than flights per day. In the United States, 63 airports around the Kamchatka peninsula (exhibit 8.10). A account for 82 percent of commercial jet trans-Siberian air route would be 1,426 kilometers operations and 72 percent of commuter shorter for a Los Angeles to Bangkok flight and operations. Yet overall, the United States has 4,191 km shorter from New York to Seoul about 3,200 airports eligible for funding from the according to an article by Gennadiy Bocharov in Federal Aviation Administration (FAA), an Izvestiya, Jan. 27, 1992. The same article reports indication of some minimal importance, and only that 100 km of orthodromic space is worth US$56 400 of these have FAA towers to provide ATC.9 for a Boeing 747. Overall, according to an article Based on this comparison, it is likely that in in Flight International, December 1992, it is Russia obsolescence is more of a problem than estimated that carriers flying the great-circle insufficient airport coverage. routes from the eastern and mid-western USA to Tokyo, Beijing, Seoul and other destinations in Government Interest in Upgrading the A TC southeast Asia would save about US$20 million System. To enable it to better manage its airspace, per year per carrier in direct operating costs. the government believes it needs an upgraded Suppliers of western-made ATC systems are ATC system to permit foreign air carriers to fly making the case that fees charged to airlines flying 171 Chapter 8 over Russia can finance the costs of installing a the system should be recoverable from user fees, modern ATC system. The government is now and the entire investment should be structured in considering making such an investment. a way that does not rely on government money to According to Aeroflot, the total cost of the system subsidize the investment. being considered would be on the order of US$10 billion, of which US$500 million would be Re-engining and Replacing Aircraft. Russia's invested as a first stage, US$750 million as a aircraft equipment is old, its engines at least 20 second stage and the remainder would be spread percent less fuel efficient than aircraft in industrial over 15 years. MOT's proposed budget for 1993 - countries, and its avionics are technologically 1995, includes US$354.4 million for the ATC obsolete (exhibit 8.11). Western-made equipment system. Aeronavigatsia projected that there would can be retrofitted to existing Russian aircraft only be about 55,000 foreign flights per year10 by the at considerable cost. Modernizing and making year 2000. If each flight saved an average of 1500 more technologically efficient equipment within km, about three hours per flight fuel savings at Russia is required, and may become justified in world prices would represent about US$150 the longer term. Technical assistance or million per year. 'According to the estimates of government investment aimed at helping Russian the independent Thompson firm, the total income authorities to retrofit aircraft should be carefully from the use of the air space over the countries of analyzed and geared to the marketplace. Ideally the CIS - under certain circumstances - could such assistance should be offered in the context of exceed 200 million dollars."1" By comparison, a commitment on the part of an aircraft IATA reports that total airport and air navigation maintenance facility to privatize and to offer charges collected from world airlines in 1991 retrofitted aircraft in competition with other amounted to US$6.4 billion. Eurocontrol alone suppliers to privatized airline enterprises. Russia's accounted for US$2.4 billion in revenues.12 new airline enterprises will be more interested in Before any investments in new ATC systems are investing in re-engining their fleets once Russia's made, therefore, it is essential to assess the real energy prices are brought to world price levels. need for such systems, given the lack of growth At the same time, the drop in demand for air predicted for air transport in Russia and the fact transport will produce a surplus of equipment that that it would appear that obsolescence rather than may make it worthwhile for airlines to use capacity expansion is the real problem with existing aircraft, even with poor fuel efficiency, Russia's present ATC system. To avoid the purchase of more equipment than is really necessary to manage air traffic over time, the government may wish to consider structuring the ATC investment on a concession basis, in Exhibit 8.11 Comparative Fuel Consumptions which suppliers would be repaid only to the extent air traffic fees are realized. In this way cn p hour suppliers of the equipment are forced to ensure that the equipment invested is suited to the market place. The government guarantee should be limited e2 to ensuring that the collection of fees takes 20Do A-TO1 place in a fair and efficient fashion according 5757 to published rules and procedures. Given the 1m tremendous drop in demand and slow recovery of air traffic predicted for Russia, therefore, o caution is in order with respect to designing and financing any new ATC system. 7he R_ WA system should be tailored to safe operations Source: Guiness Peat Aviation for realistic capacity requirements. 7he cost of 172 Chapter 8 for years. The goal of any efforts to improve aircraft. Moreover, estimated annual fuel savings Russia's aircraft should be to provide sustainable do not warrant the expenditure. If US$1.2 billion airline and aircraft manufacturing industries in the represents the price of retro-fitting only 95 to 100 long term. Such technical assistance should be planes with annual savings in fuel costs of US$30 provided in the context of broader restructuring million, the implied payback period is 40 years, projects. which hardly seems worthwhile. Aeroflot's 1991 Given the drop in demand of air transport, there Annual Report, however, claims that the economic is currently such a glut of supply of aircraft that, savings in fuel costs from re-engining the unless air travel is heavily subsidized or until international fleet (95 to 100 planes) would be existing aircraft become grounded for lack of more on the order of US$75 million. - 30 percent spares or old age, subsidized, there will be little savings of 1.34 million tons of fuel annually at demand for new aircraft. Worldwide, there are world prices of US$188 per ton. If so, the about 650 aircraft in storage compared to a payback period would be 16 years. These figures normal level of about 100 to 150 aircraft.13 imply a need to proceed cautiously with any re- Neither government nor Aeroflot have firm engining program and to design any such program estimates of how much airline service could be with as little foreign currency costs as possible. provided if all subsidies were ended, since the It is not clear whether the government or the entire cost structure of the domestic airline service airline owners will be expected to finance the hard is intertwined with that of operating airports and currency investment associated with the re- ATC. How many new or retrofitted aircraft could engining. Some re-engined planes may be leased be supported is dependent upon the cost structure or sold to other countries for freely convertible that would prevail in streamlined domestic new currency. If so, and if the aircraft are to be used carriers or remnants of old Aeroflot divisions with in the international markets, Aeroflot will be able their unnecessary staffing and overhead costs. to earn hard currency and could theoretically pay These trends notwithstanding, the government is for the investment with revenues and from savings already supporting the repowering of Russian in fuel otherwise purchased in hard currency. The aircraft and the purchase and lease of western government should not have to subsidize such a aircraft. According to MOT's budget request for program for Aeroflot International. But since 1993-95, MOT has requested Rb7.1 billion to Aeroflot International has only about 100 aircraft, support repowering, Rb5O.9 billion to acquire new it is likely that this program is designed to extend aircraft, Rb12.5 for upgrading of on-board ATC to Aeroflot's entire fleet. The capacity of domestic equipment, and Rb36.9 billion for measures to Aeroflot enterprises to finance these hard currency help develop domestic manufacturers of aviation expenditures is questionable. If such support is equipment (exhibit 8.8). The budget request also granted from the federal budget, arrangements includes US$1.2 billion toward repowering 1,500 should be made to lend the funding to new commercial jets, virtually all of Aeroflot's companies, through subsidiary loan agreements or commercial jet fleet by the year 2007. Reportedly otherwise, to remove any the government subsidy. 95 planes are already repowered and are supposed In this way, airline companies will be forced to to save US$30 million in fuel costs annually. If make investment decisions that can be supported re-engining one plane costs US$10-12 million, the by the marketplace. budgeted amount could only finance the first 95 planes. To repower all 1,500 jets would require Airport Investments. Russia has six international US$18 billion. Few of these requests, Rb22 airports categorized as ICAO Category II airports, billion for financing the ATC system and Rb37.9 130 national and approximately 3,000 local or billion to purchase new equipment, have been regional airports. Some airport facilities are approved by MOF for inclusion in the federal inadequate and in poor condition, in some cases budget. Consideration is being given to provide with railway tank cars serving as fuel storage directed state credits for other items in the agenda. facilities because of limited on-site storage. With Such expenditure is unwarranted, given the age more foreign carriers coming into Russia, there is of the aircraft and the current worldwide glut of great interest in improving and modernizing 173 Chapter 8 W . . .. . Privati'in 'Air Traffi Contrtl .. . .. . ... . ..... ;:;000Australia,l German'y:, Switzerland,; and: New Zealand, jhave- restructured their :civil :aviation: Air 'Trafficg Controlt: ; (0'll:ATC 0 funct.ions along comm.erciallfines, although still owned by.the state, these entitiesfunctiona as for-profit it;.companies, paying their operational costs'::and iplanning tinvestments :out of their own:revenue. iIn. Germany,0:i: i::E:~ ~ ~ ~ ~ ~ ~ ~~ ~~~.. ..E !i R:TE R:.. Ri !; :iE W . ..::- . .-... i-:i . . .# :. : ::.. .E .: .... .:: .. .:.. Ei, :i . :iT:, : :: iEi : : revSen.ue sources. are.ATC .teoff.and.landn g fees ; inAust rala,revenues come from:airwayand terminaluse :g fiees 0andi aviation :gas proceeds; from: s;ales .to :iprivate; tpilots.;: Since: privatization:, :reductio:ns |in: airspace--:: f;::systeni/enroute':charges :(which both collect) ipartially offEset: increasesE mn ground :service Cand termninal fees! indS:f both cases. More: efficient and strealined operations combined with, at least in. Australia, a tripling ' the .t00rate ;of icapital tinvestment: sincet0 1 988 ,0 has :led; tofa: treduction int delays and 0;in enroute :charges.: 'Although .ATC0 0 0 : ::0workers :made fredundant fby: reductions in thfe :workcforce: weref on; the freceivi'ng: fend of -some: A$5i7 imillion: in::- iXseverancet gpay: in 01992,0 Australia's CA0A l!paid: AS 16 million in taxies and Wa :A$ 1 .5 mirllion diviBdend! to; gthetgl lt :;':federal :|govYernment,:}0 its' sole ::shareholder.t Inl :Germnany,:} whichf has }to' contend fwithX a': fragmented 'airspace-0;0 0 ;D;ftcomplicated; by l]arge chunks resferved; exclausively; for military use (oth NATO; and, ;untill sometim:e in 1:994, :$ } sRussian) zintegration of civil::and: military ATC is to-be accomplished: in full: by 1996.-e:: ::: ::: ::::s There are lessons o be had in these expeences for Russia, the most important ones being that not all state- . . ... . . .. ..9 .. .. . .....:SI: S 7S S :: : 7 : : : . - -: : :: ;l|.owed enEterprses have. to be funded gfrom ;the federal .budget, 'and that:'civilian::andi military ifunctions are, i'n W,' thi -ds :instance, :compatible.: The::fact- that the privatized: ATC :authonities in:Gernmany: and Australia rare making:::. :g:-their :inv:estmVents .without uthe ,benefit Eof :supporti from; State :Centralized Capitalt Investment :funds -should-:.: encouragei thegoverinentit consideri convertng the bCommissionforAirspiceiand Air Traffi c Managementt6l C!. : of t0he ;Gov,ernment .of - the- Russian: Fed erai:tion }(Rosaeronavigatsia) inmto ;0such: -an entity.;: Potential: suppliers'W; i (GATSS consortium Iandh othe point tto bte :potential of ATCrevenues for funding investments in TCi : 7 .equipment :which ithey 'propose:'to Ssell. :There isf no: need, $however, -for :the; governent: to VmaCkehasty ;decisions --f (perhaps leadingto 1inappropniate, unnecessary,ugor excessiveinvestments) wi:thoutfirst creating an independent f: S;or-profit ::ATC .authority: capable: of Sassessing .:the 00real Vrequirements f :or ,Russia's' present- and future 0ATC.;f::T nl:-iteeds. WThere is: Xaneed,l on the other h'and, -to:'ensure that the equipmient investeid in is :suited to the arkalet ! placeA Governmentngtarantee sould be limite to lensuring itat the collection of fees takes place ina fair . and f efficient fashion according to published rulles and procedures. ;Technical assistance aimed at improvingRussian :-.pa ei q l . e1:': i : M :E R: E: 'i . . ...!.E E . E - e -:;ATC, i:;f properly ifocused and gmanraged, couldy lead- to :the: rrapid crreation of Ean teffective, efficient1 and- financially-sourd ATC authoty fto manage Russias airspace.li X Sources: 7Leonard Hill, It;Its Qa Prva eMatter,;" Air Transport; World :(February* 1993):, pp 88-92 lPaul Proctor,0:: ;00iAustralia ;Reapst Benefits; of S CAXA0 Restructurmng, "fAviation' 'Week 0&- Space :Technology (Januay 1:8, :1993)J,00 0 airport facilities. At the same, time a number of decision about the structure of the industry. the regional Aeroflot enterprises or associations Given the continued decline in air traffic, it is that have formed joint ventures and wish to advisable that the government proceed slowly with privatize are pressing the government to improve any decision to provide funds for any airport and their airports. Municipal governments and cities first ensure the separation of ownership between are also pressing to upgrade their airports with a airline and airport. Airports must be financially view toward attracting tourists and new autonomous and self-sufficient, and must allocate businesses. Airports are seeking donors to prepare access on a non-preferential, freely competitive master plans for future development, and a basis as determined by market demand. If there number of these have been financed. Many plans truly is a demand, airport improvements should be being suggested are probablypremature, and it is financed from a combination of concessions, questionable whether any consultant could forecast providing land terminal space to airport users, and the likely number of flights or airlines at a given landing fees or ticket surcharges. Moreover, any terminal before the government has made a financing or concessionary deals should be made 174 Chapter 8 in a way that provides access to a number of corporation of American Airlines, owner of the competing airlines. All airports should provide Sabre reservations system, to develop this system. services on equitable terms to all airlines having Questions concerning the funding of development, rights to land in them. Unfortunately, the ownership, and access rights have yet to be government is apparently already considering addressed adequately. An estimated cost of financing a number of airports according to US$150 million (Rbl.5 billion) has been derived, MOT's budget request for air transport. Of the but sources of funds have not been identified, and Rb7. 1 billion budgeted for airport construction by the ability to repay foreign currency debt hinges MOT, however, only one, is an air terminal on the ultimate convertibility of the Russian ruble complex at Sochi, has been included in MOF's since revenues from the proposed system are approved federal investment budget. Sochi is a likely to be collected in rubles. In any event, this resort on the Black Sea built recently that has no is not an area where further public sector roads leading to it, and which the government involvement is essential. wants to complete so the resort can be used. The A travel industry is beginning to develop in cost included in the federal budget is Rb2.9 Russia, and any carrier reservations system should billion. be developed with the needs of this service Where airport construction, modernization or industry in mind. Air transport companies owning runway rehabilitation is justified the airport should such systems frequently provide favorably-priced be financed by the private sector, with fees from long-term leasing arrangements for the necessary passengers, landing fees and freight forwarders, equipment and software, and some provide low or and construction done under contract after no-cost training."4 Therefore, it appears that some competitive bidding. There is some indication one opportunity for establishing a joint venture exists. or two new cargo airports could be viable Deregulation of the Russian air transport and somewhere in the middle of Russia, such as travel industries would allow interested private Novosibirsk. investors to pool resources and ensure that their In the past, construction of airport facilities and particular demands are satisfied in the financing air navigation/ATC structures was performed by and development of a new reservations system. a number of government-operated construction Care must be taken to see that the system enterprises (GlavStroi, PromStroi, and TransStroi, developed fosters rather than inhibits both among others) each of which had particular domestic and international competition. specialties that prevented competition among them. Airport design and economic studies were Near-tenn Recommendations often undertaken by the GosAeroProekt enterprise. These enterprises should be privatized Continue Efforts to reduce the airline sector's if possible, and made to compete for business. negative fiscal impact. Maintaining existing Given the likely decline in the number of new measures to limit airline operating losses is airports needed, it is not clear that all these firms essential. The government is well aware of will survive. increasing losses from air transport and is trying put a cap on the growing subsidies by (a) ceasing Air Carrier Reservation Systems. MOT is all direct airline subsidies as of January 1, 1992, planning to upgrade existing reservations systems (b) granting airlines freedom to raise tariffs up to through the introduction of modern technology, a ceiling on profits of 20 percent, (c) gradually possibly in cooperation with international lending raising fuel prices to world levels, and (d) first institutions. The proposed system, being cutting fuel subsidies to 50 percent and developed by a consortium and based on the subsequently eliminating them. Such measures aim existing Sirena-II reservation system, is to be at pushing airline companies to become self- compatible with U.S. and European full-service sufficient, by forcing them to shape their systems, allowing for flight bookings, hotel operations to those that can be supported in the reservations, and interline payments. An marketplace. To do so, airlines have had to agreement has been concluded with the parent drastically reduce the number of flights offered, as 175 Chapter 8 higher prices have reduced demand. The confidence that its services are carried out government should be congratulated for taking accurately, fairly, and promptly. these steps and should be prepared to resist pressures from newly established airline The government should reassess and terminate companies and their constituencies to reverse these wherever possible programs that finance policies. These pressures are likely to be intense investments, including building new airports, as, on average, revenues are currently covering acquisition or re-engining aircraft or introducing only 70 percent of costs. an air reservation system for privatized airline Further rationalization and retrenchment of companies. To the extent such investments have airlines and associated enterprises is undoubtedly already been made, the government should necessary. To assist the airlines in shaping their organize formal transfer of the responsibility for organizational and cost structures to levels repayment of existing debts incurred on their supportable by revenues, the government may behalf to the benefitting enterprise. Investment have to undertake to provide assistance to decisions for essentially commercial systems redundant labor and subsidize related social should be made by private companies. services for a limited transitional period. Develop within MOT the capability to analyze Ensure that the government fully compensates the financial and operational performance of airlines for provision of services to the state for Russia 's domestic and international airlines and of governmental business or social purposes. One of the A TC system so that it can develop appropriate the most pernicious sources of poor financial policies for the structure and operation of a performance is requiring airlines to grant free or private, competitive, financially self-sustaining subsidized travel to government officials. Such aviation system. Understanding the performance of privileges are usually abused by overuse, the airline industry and the ATC system are occupying seats that could otherwise be generating critically important capabilities for MOT to badly-needed revenues. This practice also develop. If the government is to build a policy promotes an attitude of financial irresponsibility framework in which a competitive private airline that affects the performance of the entire airline. industry can thrive, it must understand how the industry is performing and modify policies as Encourage airlines to restrict extensions of required. It has been reported that over 100 small credit for airline service to state enterprises. A local airlines are operating at a loss. In due practice contributing to the erosion of fiscal course, there may be pressure to consolidate some discipline and artificially inducing a higher of these firms, and MOT needs to be able to demand for transport in the process is the routine assess the extent to which such mergers should be extension of credit to customers and other facilitated. Given the government's financial enterprises who do not and will not have the strictures, providing high quality policy and means to pay. Airlines need to require customers financial analysis of airlines and the ATC system to pay for services up front and offer only is essential. services supported by such payment until sound The government should also prepare a strategy credit status is reestablished. for de-monopolizing and privatizing Aeroflot, to ensure the separation of airlines from airports and Take steps to upgrade the clearinghouse for to introduce competition within Russia's domestic inter-airline settlements, so that it can offer airline markets. The strategy should include the prompt and accurate payments in accordance with following elements: clear and agreed accounting practices and standards and ensure that the clearinghouse In the context ofprivatizing airports, ensure that agency is independently owned and operated. An each airport offers its services on an equal basis interline settlements agency is essential to an to all carriers. There cannot be competitive airline integrated, competitive airline industry. To be service without equal access to airport facilities by effective, all participating carriers must have all carriers. An airline-owned airport system is 176 Chapter 8 inconsistent with that goal. Generally speaking, * Cargo handling should be undertaken by airports should be owned and operated by local several companies that compete within each authorities in a fashion that will ensure airport, and airlines should be free to contract competitive airline service to the community and with any of them. efficient operations of the airport and its * Ownership of Sheremetevo-2 International concessions. The ideal process through which to Airport should be separated from Russia achieve these goals is one of competitive bidding International Airlines. by contractors competent in airport operations and * The Central Advertising and Information management. Agency could be put on a private basis, and all airlines should be free to choose whether or not to Ensure that newly privatized airline operations use its services. are permitted to compete with each other in the same markets and, as time goes by, to merge and Prepare a strategy for how to divide Aeroflot's rationalize themselves as marketforces dictate. A international operations and international assets major challenge facing the development of a among CIS countries that wish to have their own competitive domestic airline industry in Russia is international airline. The process of segmenting the transformation of a set of regional airlines that Aeroflot's international operations among CIS are essentially administrative entities into countries will require settling disputes over functioning, competitive airline enterprises. Two ownership of foreign-owned facilities as well as problems are involved. The first is to create a landing rights. These issues are complex and will corporate - rather than an administrative - require careful analysis and patient, good-faith atmosphere within the entities. The second is to negotiation. As an illustration of the complexities, change their service patterns so that they begin to the current landing rights agreements in Ukraine compete with one another in appropriate markets, give foreign carriers the right to land in Ukraine thereby producing the efficiency-producing for five years, but the landing fees are paid to benefits of competition. At the same time, the Aeroflot in Moscow. declines in traffic and financial pressures will inevitably lead to proposals for merger between Restructure andfederalize activities of MAK that smaller regional carriers; any such proposals are appropriate governmental functions. MAK, should be examined carefully by the government the CIS Interstate Aviation Committee, performs before approval, to ensure that competition will be many functions, such as bilateral negotiations on enhanced, not reduced. landing rights, aircraft certification, promulgation of civil aviation standards, accident investigations In privatizing or corporatizing Aeroflot and other safety matters, licensing of airports, and enterprises involved in international aviation, certification of air traffic controllers, that are dissolve the Production and Commercial properly the functions of individual governments. Association and privatize its individual entities in While it is not unreasonable to have such a a way that breaks the ownership linkages of committee perform functions such as planning for airline and airport and enhances competition. The airspace management near republican boundaries PCA was formed to combine under a united or coordination of overflights, such a body should enterprise a number of organizations connected not exercise authority that is the appropriate with international airline operations. If sphere of MOTs of the individual republics. As privatization were to take place at the association Russia develops its MOT organization for level, the vertical integration and monopolistic aviation, it must integrate these functions into its nature of the enterprises would be left in place. new statutes and regulations and assign them to This would be harmful to the development of appropriate agencies. efficient airline service. For example: * A cargo handling company should not be a Privatize airport construction companies and single operator owned by Aeroflot International ensure that airport construction is contracted Airlines. through competitive bidding. The old structure of 177 Chapter 8 the airport construction industry was fragmented airline and aviation system. As part of the and anti-competitive, with each of the three major exercise of its responsibility for safety, MOT must enterprises focusing on a different specialty. For fashion an organization that can create or adopt major repair and rehabilitation of airport facilities and enforce appropriate standards for aircraft and to be efficient, Russia needs a competitive airport aviation system design, performance, and construction industry. To assist in structuring new maintenance. capabilities, Russian firms could participate in joint ventures with Western firms. Establish an independent agency to investigate air accidents and incidents and to recommend to Assess safety performance of the airline and government appropriate remedial actions. aviation system, and develop a short-term action Following up on the emergency assessment of program to alleviate critical deficiencies. Because safety issues in the short-term, the government of the resource constraints of Russia's current needs to develop an independent capability to economic situation and their potential impact on investigate air accidents to ensure that it can sound safety practices, the government should identify the causes of accidents and incidents and immediately direct resources to an assessment of recommend remedial measures without the bias of critical safety issues in the airlines and aviation having the agency that operates the aviation safety system. program try to assess and criticize its own performance. Medium-term Recommendations Establish policiesfor devolving responsibilityfor Continue the restructuring of the airline sector. planning, construction, and financing airports to In the medium-term, airline sector restructuring local authorities in a manner that assures that any should continue to develop through various steps federal financing of airports is based on user that include: (a) maintaining the government's charges and made available on the basis of policies designed to limit airline operating losses, equitable apportionmentprinciples. For reasons of (b) continuing the rationalization within a efficiency and prudence, in the course of competitive structure of Russia's domestic establishing policies for the development of the regional airline system, and (c) continuing to airport system, the government might set up some develop policies and practices to integrate the national-level user-charge-based mechanism to aid Russian aviation system more effectively into the in financing improvements to the airport and international aviation system. airways system. Complete the separation of the ATC systemfrom Even if this is done, however, it is important Aeroflot, and structure an appropriate system of that the ultimate authority for planning, charges to finance the upgrading of its operation constructing, and financing airports devolves to and improvement. In the medium-term period, the local authorities. In this context, there must be government should complete the institutional and clearly stated, fair principles for allocating any financial separation of Aeroflot and its successor national-level funds to aid in the airport- airlines from the ATC system. This is necessary construction process. both to complete the restructuring of the airline industry in the private sector and to establish Introduce competitive bidding for the provision appropriate institutional and financial mechanisms of airline service to low density northern zones. for the design, operation, maintenance, and The government must provide for essential airline upgrading of the ATC system. The operation and service to the remote northern zones for which maintenance of the system should be financed by there is no other type of access. To provide this the users on an equitable basis. service most efficiently, MOT should offer service packages to competing air carriers to bid, so that Establish capability within MOT to promulgate subsidy levels for providing such service are kept operational and maintenance standards for the as low as possible. 178 Chapter 8 Notes 1. Aerodevco, EBRD Aviation Sector Survey, 7. These include: Aeromar, (on-board catering); p 12; Aeroflot, Annual Report 1991. Aerofirst (duty free shop); Aeroservice (airport services); Sherotel a venture with Sheraton to 2. The January 1993 price for one metric ton of build and operate the Hotel 'Novotel' at Moscow aviation fuel was Rb3O,000 (Valeriy Geysherik, Sheremetevo-2; a Russian-Canadian joint-venture "There Are 103 Independent Airlines Under to open the Aerostar Hotel; a Russian-German Aeroflot's Flag," Vek (15-22 January 1993), p 8, joint venture Aeroport Moscow to construct a new translated under "Independent Air Companies international air terminal on the basis of Highlighted," Central Eurasia (FBIS-USR-93- Sheremetevo-1 Airport; and a joint venture with 016), p 61), while the spot cash market average British Airways to set up a new airline, Air price of jet fuel in Europe as of mid-January 1993 Russia, at Moscow's Domodedovo Airport. was US$188 per ton. At an exchange rate of Rb650 per US$1, Russian airlines were paying 8. Business in the USSR, February 1992. only 25 percent of world prices for fuel. 9. Deregulation (Winds of Change - p 203). 3. Translation of an interview with A.A. Larin, Russian first deputy Minister of Transport and 10. As reported in the EBRD-financed study, Director of the Department of Air Transport, in Russian Aviation Survey, Draft Final Report, Grazhdanskaya Aviatsiya, No. 6, June 92 pp 2-4. Appendices, Volume 1 of 2, p 25, prepared by (FBIS-USR-92-127 3 October 1992). Aerodevco Consultants, Ltd., August 31, 1992. 4. MOT Concept of the Development of the 11. Izvestiya, Jan 27, 1992, Morning Edition, p 3 Transport Complex in Conditions of the Transition by Gennadiy Bocharov. to Market Relations, Moscow 1992, p 12. 12. Anthony Vandyk, "IATA Warns of Higher 5. Viktor Belikov, "Competition and Free Prices Charges for Airlines," Flight International (3-9 Come to Air Transport," Izvestiya (Morning March 1993). Edition, 19 December 1992), p 3, translated under "Air Fare Hikes Expected," Central Eurasia 13. Stanley W. Kandebo, "Stable Engine Sales (FBIS-USR-92-167), 31 December 1992, p 49. Seen in Late 1994," Aviation Week and Space Also data provided to World Bank mission in June Technology (15 March 1993), p 77. 1993. 14. Transportation Research Board. Winds of 6. Russia Aviation Survey, Final Draft Report, p Change (Washington DC: National Research 56, Prepared by Aerodevco Consultants, Ltd., Council, 1991), p 286. August 1992. 179 9 Transport Equipment Manufacturing When the USSR dissolved, it disrupted the buses for urban public transport - emergency industries that manufacture transport equipment measures must be taken now to keep the existing for the Russian transport system. Those industries fleet running, by replacing critical components, had been developed with component rebuilding, and remanufacturing. In areas such as manufacturing facilities in CMEA countries of railways, trucking, and aviation, where demand Eastern Europe and various FSU republics. The has fallen substantially and current stocks of impact was particularly heavy on Russia's operating equipment are utilized at a low level, railway, trucking, and bus industries, which there is more time to restructure, redirect, and suffered the loss of major manufacturing facilities upgrade the processes and technologies of the and long-term commercial arrangements. equipment manufacturers through licensing and While diverse in many respects, the equipment joint ventures with western firms. These measures manufacturing industries for the various modes will take years to implement, if done properly, share a common set of problems since the and can only be implemented effectively if the dissolution of the USSR. proper framework of financial and intellectual * Economic dislocation, which has disrupted property laws is first put in place. In the formerly integrated markets through lowered meantime, dramatic changes should be fostered to demand, political strife, divergent economic create a vital and competitive intermediate level interests, and new international boundaries. industry, between enterprise-level maintenance * Poor design of many critical equipment and the manufacturers, to provide sophisticated components, especially motors, and inadequate services ranging from heavy maintenance to systems for quality control in manufacturing and remanufacturing and rebuilding transport assembly. equipment components and vehicles. * Economic collapse, which has raised prices The consequences of the dissolution of the of new equipment, erased the profits of the old USSR and of the CMEA economic structure have system's enterprises, and lowered currency values been felt severely in the area of machine-building so that few are able to afford new equipment. and manufacture of equipment for the Russian The immediate problems facing Russia's transport sector. Trade relations between CMEA transport companies call less for new equipment member states were based essentially on a than they do for effective measures to repair, politically-driven barter system as spelled out rehabilitate, upgrade, and use more intensively the within the framework of the Five Year Planning equipment now on hand. process. Under this process, certain countries or In those cases where current equipment needs USSR republics were charged with manufacture of are large and urgent, and where demand is certain certain items not having an implicit military either to be stable or to increase - such as for application, for example diesel multiple units 181 Chapter 9 (DMU) and electric multiple units (EMU), which railroad supply, the most important ministry was they had traditionally produced, had existing the Ministry of Heavy Machine Building, capability to produce, or were designated to responsible for producing diesel locomotives, produce for political reasons, for the entire engines, some track machines, wagons, and other socialist marketplace. Russia's wealth of natural major components. Other ministries were the resources, including primary energy resources, Ministry of Communications Equipment, now part were used to bind Eastern Europe and the other of the defense ministry; the Ministry of republics of the USSR firmly to Russia, creating Metallurgy for rails and other steel structures; the in many productive sectors a quasi-mercantilist Ministry of Forestry and Paper for wooden system with Russia as the primary supplier of raw sleeper manufacture, but not sleeper treating, materials. The countries of Eastern Europe and since treatment plants are operated by the the southern and western parts of the USSR were railroads; and the Ministry of Electrotechnical the primary manufacturers and suppliers of many Instruments and Computers for electric light industrial and non-military finished products. locomotives, computers, and some instruments. As a consequence, Russia today finds herself In addition, the railroads purchased equipment scrambling to diversify the capabilities of her and various other railroad materials from other manufacturing base to serve the needs of all CMEA countries: East Germany produced modes of Russian transport. The impact of the compartmented sleeper cars, thyristors and other transition to a market economy has affected the components; Czechoslovakia produced passenger several transport modes differently, and actions electric locomotives; Hungary produced DMU taken to ameliorate the impact have varied across equipment; Finland produced some wagons; modes. Latvia produced suburban EMU passenger equipment; and Romania supplied grain freight Tfhe Transport Equipment Manufacturing Base cars (exhibit 9.1). Railways. Although the Soviet MPS was a Supply Disruptions. The CMEA model served vertically integrated organization, its railways as the pattern for developing a railway support performed only a small portion of their own industry in the USSR. Plants located in the manufacturing. Nevertheless, most major various republics operated on the basis of workshops and many large depots have extensive cooperation and specialization, with plants manufacturing capabilities, including foundries, manufacturing their components according to plan blacksmith shops, motor rewinding facilities, and shipping their output elsewhere, either for sheetmetal and sheetsteel fabrication, machining component assembly or installation. In December centers, carpentry shops and similar facilities. The 1987, this network was formalized within the track administration manufactures some of its own framework of the Union Railway Automation equipment, sleepers, building and bridge Scientific Production Association (NPO). Until the materials. Of the 19 plants in the three Slavic dissolution of the Union, anywhere from 60 to 90 republics that produce signalling and percent of the equipment manufactured by the communications equipment for the railways, NPO's subsidiaries was produced and distributed Russia is home to 11. Of the two plants that through this network. manufacture electric traction supply materials such Along with the USSR, this supply network as overhead catenary, one is located in Moscow. dissolved. MPS has approved a program that In addition, 15 sleeper impregnation plants, 40 restores this sort of operation within Russia and producers of crushed stone for ballast, and 23 rail also arranges for the development of a domestic welding enterprises are situated in Russia, as are production capability, within the subsidiary the eight mechanical repair plants of the enterprises of the NPO remaining in Russia, of Remputmash Association, which maintains track basic product elements such as rail fasteners, maintenance equipment. produced almost exclusively at the Druzhkovskiy The bulk of major manufacturing has been Plant in Ukraine, now manufactured in Belarus performed by other ministries. In terms of and Ukraine. 182 Chapter 9 The dissolution of the USSR has disrupted much locomotive are produced in Ukraine. Further of the previous manufacturing and sourcing of complications in production have arisen as a result component parts. Supply outside a republic is of the disruption in commercial contacts between tenuous at best and often depends upon barter. the Novocherkassk plant and a similar plant in Supply outside the CIS is nearly impossible Thlisi, Georgia. Combined production of these because of the lack of foreign exchange. In two plants was expected to be 500 units in 1991; addition, Soviet planners believed strongly in deliveries amounted to 255. As a consequence, the economies of scale. The few engine manufacturing diesel locomotive manufacturing plants in facilities, for example, were big. Now many of Lugansk, Ukraine, and Kolomna, Russia, are those big plants making critical components are in diversifying their production bases to include an republics outside of Russia and require hard electric locomotive manufacturing capability. In currency or much higher prices than was addition to Kolomna, Russian diesel locomotive customary in the past from other republics. manufacturers include the plants in Briansk and in This is especially true in regard to the Liudinovo. production of EMUs used for suburban passenger Additional disruptions are arising from the service in many major metropolitan centers of the political uncertainty in the government. Many FSU. The sole producer of these units is in Riga, manufacturing facilities are now nearly and the price of a ten-car consist has increased independent entities; not private, but not receiving from Rbl.3 million in January 1991 to Rb53 state backing or much direction. The Railcar million as of June 1992. This situation has Repair Plant in Voronezh, for example, was the prompted Russia to search for a domestic traditional supplier of rubber components used in manufacturer of this equipment. The the repair of EMUs and other railcars. This Demikhovskiy Machine Building Plant, situated in production facility was transferred to a the Moscow Oblast east of the city, has been cooperative, which identified a more lucrative identified as the first plant to diversify its production into this field, and Rb42 million has been invested in preparing the plant for this new role. The first five non-motorized wagons were to be produced by December 25, 1992; manufacture Exhibit 9.1 Railway Asset Manufacturing Sources of motorized units is to begin later. in FSU Countries Except for EMU manufacture, final production Product Source of many items has stopped because critical components cannot be procured, despite the nearly Communications East Germany vertical integration found in many manufacturing 25kV transformers Ukraie facilities. For example, the electric locomotive Tank wagons Russia manufacturing facility in Novocherkassk (near Flat wagons Russia Rostov-on-Don, Russia) manufactures most, but Containers Russia not all of the components, involved in electric Grain cars Romania locomotives of the 10,000 kw VL80, and the 12 Gondolas, hoppers Ukraine axle 10,000 kw VL85 type. It purchases steel, Electric locomotives Russia, Georgia, wire, thyristors, wheel tyres, locomotive radios, Czechoslovakia wr, tyior, whe e, loooierdo, Diesel locomotives Russia, Ukraine light bulbs, paint and plastic resin. From this, it ieocomotives Russia Locomotive engines Russia makes nearly everything else required to make an EMUs/suburban carriages Latvia electric locomotive - from traction and blower DMUs Hungary motor cores and armatures, to seats, circuit Track equipment East Germany breakers, wheel castings, bogies, and suspension Passenger carriages East Germany, Russia, systems. Locomotive manufacture at this facility Yugoslavia in the Russian republic has been significantly reduced, however, because the main transformer aseml an ,h i opesr sdi h Source: EBRD Rail Sector Survey and IBRD research. assembly and the air compressors used in the 183 Chapter 9 market in the production of various gaskets, railroad has not yet paid, nor has the manufacturer sealing rings, and other items for the Zhiguli, paid his suppliers. This is becoming very common Moskvich, and Volga automobiles, and shifted its because many facilities have significant cash flow manufacturing base accordingly. problems. A further consequence of this Further diversification of production is taking insolvency is that materials being produced for the place in response to changing market conditions. railways are not being delivered for lack of ability The Tver Railcar Building Plant is contemplating to pay. Thus, by June~ 1992, more than 20,000 the production of DMUs in conjunction with the tons of rail had accumulated at the Nizhniy Tagil Liudinovo Diesel Locomotive Building Plant, for Metal Combine, which refused to allow the rails domestic use and for export, and of compartment to be loaded until payment was received. passenger sleeper cars previously supplied exclusively by German and Yugoslav Because of these supply problems, the railways manufacturers. In other cases, manufacturers are are performing more rebuilding than normal. In concentrating on manufacturing for export or on fact, it is likely that the greatest single source for consumer products. For example, the electric the development of an effective long-term locomotive manufacturing facility at locomotive remanufacturing capability for Russia Novocherkassk now produces desk lamps, small will be underutilized railroad shops. The electric heaters, and washing machines, and development of this capability should be fostered electric irons, which it had produced for some by Government. In the meantime, however, many time prior to dissolution of the FSU. Last year, functions are delayed or stopped for lack of much of its production went to Finland and China. appropriate materials. In addition, many railroad At the same time, work continues on the new VL- facilities are attempting to develop a capability to 65 electric locomotive, serial production of which manufacture critical components. While this may is scheduled to commence in 1993. be a feasible short-term solution, it is unlikely to As existing manufacturing plants are privatized, be very economical in the long term, especially there will be greater opportunity to enter into joint since the level of technology of the final ventures with western and former military manufactured items should be changed for a suppliers that have capacity or advanced variety of reasons. technology. In fact, through the Conversion and Transport program, the Ministry of Heavy Road Transport. The Soviet truck manufacturing Machine Building plant in Briansk, which industry was designed to meet the requirements of produces diesel locomotives, is scheduled to begin the military and the large companies in the the manufacture of grain hoppers previously centrally planned economy. The mix of trucks in obtained from Romania.' Further diversification is Russia today reflects this task: more than 70 already underway, as the "Progress plant in percent of the production capacity is for medium- Samara, which manufactures the Energiya booster sized, unspecialized units with 4 to 10 ton rocket used with the Soviet space shuttle program, capacity, manufactured in standard designs for a is adding a passenger coach and motorized EMU wide variety of assignments. In contrast, small wagon manufacturing capability to its production trucks of less than 2 tons payload account for 88 base.2 In addition, the Ural Railcar Plant, percent of the vehicle fleet in the United States Uralvagonzavod in Nizhniy Tagil near and 67 percent in Germany. MOT, Agroprom and Ekaterinburg, which manufactures the T-72 tank, Supreme Economic Council authorities is slated to begin production of 1,000 tank cars interviewed all confirmed there is no production annually.' in Russia of this important segment to serve local In many cases, manufacturers are making barter distribution requirements. Also in short supply are or loan arrangements with former suppliers to fill heavy trucks and manufacturing capacity for them. existing orders. One manufacturing facility had Fleet and production capacity for heavy trucks are supplied equipment worth over Rb125 million to expected to fall short of demand in the medium to the railroads while borrowing materials worth long-term. Real needs for small and large trucks over Rbl00 million from various suppliers. The are unmet and are expected to remain unmet for 184 Chapter 9 some time. The demand in the marketplace for Russian truck production is concentrated in five large and small trucks should drive the truck large factories: ZIL in Moscow, GAZ in Nizhniy manufacturing industry in Russia toward the Novgorod, AvtoUAZ in Miass, Ulianovsk, and production of such models. KamAZ in Naberezhnie Chelny. Although the The truck fleet manufactured by the Russian theoretical production capacity of the Russian manufacturing industry today accounts for 86 truck manufacturing industry is 719,100 units a percent of the truck production of the FSU and year, the Ministry of Industry's (MINPROM) reflects the perceptions of the centrally planned Department of Automobile Industry reports actual economy and the Five Year Plan cycles. output of 585,400 and 529,800 units in 1990 and Information is not readily available for past years 1991, respectively, and a projected output of because trucking industry production used to be 522,900 in 1992 (exhibit 9.2). The truck classified on military grounds. manufacturing capacity of Russian industry is also Exhibit 9.2 Russian Truck Production Capacity Production (000) Actual Jan.- Prod. Capa- Actual Actual Proj Sept. Company/Truck Type Since city 1990 1991 1992 1992 ZIL, Moscow 200.7 184.2 158.1 150.0 112.5 ZIL 4331, 5 ton 4x2 gen purpose, diesel ZIL 1975 5.0 4.0 4.4 ZIL 133 5 ton 4x2 gen purpose long platform, diesel KAMAZ 1975 10.0 3.9 3.3 ZIL 157 6x6 off road, gen purpose? 1958 15.0 10.3 0.8 ZEL 131 6x6, 4 ton military2 1968 50.0 49.8 43.3 ZIL 130, 4314, 4x2 gen purpose' 1962 120.7 116.2 106.3 GAZ, Nizhniy Novgorod 294.0 249.3 199.5 228.7 167.1 GAZ 52, 2.5 ton' 1967 54.0 55.1 21.9 GAZ 5312, 4.5 ton, agricultural use 1965 200.0 154.0 139.5 GAZ 66, 2.5 to 3 ton, 4x4 military/civilian/agri dumpers 1963 40.0 40.2 38.1 URALAZ, Miass 31.6 31.6 31.4 23.3 17.5 URAL 4320, 5 ton 6x6 gen purpose, gas engines 26.0 26.2 25.9 URAL 5557, 5 ton 6x6, agricultural dumpers 5.6 5.4 5.5 UAZ, Ulianovsk 42.8 40.8 38.1 40.8 30.6 UAZ, .8 ton 4x4 light truck 42.8 40.8 38.1 40.8 30.6 KAM,Z, Naberezhnie chebny 150.0 116.4 102.7 80.1 60.1 KAMAZ 5320 8 ton 6x4 general purpose 30.0 32.0 28.0 KAMAZ 4310 7 ton 6x6 agricultural dumpers 40.0 18.4 14.0 KAMAZ 5511 6 ton 6x4 agricultural dumper 40.0 43.0 40.0 KAMAZ 5410, 11 ton 6x6 heavy trucks 40.0 23.0 20.7 1. Production to stop in 1992. 2. Presently being converted to civil use. Negotiations under way with Caterpillar & Perkins for diesel engines. 3. 25,000 produced with special platform and hydraulic dumpers. 4. Smallest GAZ truck; reconstruction underway to 1.5 ton model; planned 75,000 units a year. 5. Cooperation with IVECO/FIAT, Italy, diesel engine KHD 8 cyl type BF8L513; license production Kustanai, Kazakhstan. 6. Engine produced by Cummins joint venture; truck for international transport; production capacity 10-12,000 engines a year, Russian competition for Belarus' SuperMAZ. Source: Ministry of Industry, Russia, Department of Automobile Industry, October 1992. 185 Chapter 9 described in further detail by class of truck (see reorganizing themselves into joint stock companies Box). and allowing foreign partners to obtain share Buses. The vast majority of urban transport interests. For example, KamAZ reorganized, buses were manufactured in Hungary by Ikarus, formed a more independent management, and while buses assigned to suburban routes were signed a joint venture agreement with a U.S. manufactured for the most part by lkarus and the based engine manufacturer to create KAMDIZEL. Lwow Bus Plant in Ukraine. Of the 84,380 buses Apart from the technical problems with truck manufactured in the USSR in 1990, a 6.9 percent design and manufacturing, Russian industry is decrease from the 90,618 produced in 1989, the experiencing severe shortages of raw material and Lwow plant, which specializes in medium-size components. Both the Supreme Council and intercity and local or rural route buses, accounted MINPROM anticipate a further reduction in truck for 14.5 percent of overall production. The Riga output, but data provided by the Russian State Bus Plant, which specializes in a line of minibus Statistics Committee is the most pessimistic by models, accounted for 20.3 percent of total 1990 projecting truck and trailer production to be off by bus production.4 Russian bus manufacturers 9 percent and 77 percent, respectively, in 1992 include the Likino Bus Plant LiAZ, which from 1991 6 manufactures large city buses (6,002 in 1990); the Pavlovo Bus Plant PAZ, the main producer of Alternatives for Technology, Productivity, small-size buses (8,600 in 1990); and the Kurgan and Quality Improvements Plant KAvZ, a producer of small general purpose buses (19,360 in 1990). Implementation of Diesel Engines. Diesel engine AvtoUAZ and KamAZ are also in the bus use is relatively low compared with western manufacturing business, having accounted for 15 countries: 41 percent of Russian trucks are diesel and 5.8 percent, respectively, of overall bus powered compared with 85 percent of all Western production in 1990. The domestic trolleybus European trucks. The Russian manufacturing producer is the Uritskiy Trolleybus Plant, which industry is trying to solve this problem through registered an output of 2300 vehicles in 1990. joint ventures and cooperations with western Soviet-era programs in existence as of 1991 suppliers. Western partners are hesitant about foresaw increasing bus production in the USSR providing hard currency loans or equity, however, under the auspices of the Avtrokon Concern, an without a legal framework that protects intellectual association of bus and trolleybus producers. Under property, provides a realistic operating basis for this plan, three additional bus manufacturers were joint ventures and manufacturing contracts, to come on line - the Davydovka, Golitsyno, and provides for bankruptcy, and without Tula Bus Plants - while all other manufacturers improvement in the macroeconomic framework. were expected to increase output. After the dissolution of the USSR, Russia has developed Joint Ventures and Licensing. The privatization what could be viewed as a successor program to process has made possible extensive cooperation the Soviet-era Passenger Transportation program. talks between Russian manufacturers and western It is likely that some components will be companies. However, these agreements and preserved and even expanded, such as Avtrokon's initiatives are still burdened with legal series of contracts with Mercedes Benz to inefficiencies, such as property rights. manufacture 2500 inter-city tour buses under license at the Golitsyno plant.5 Major Obstacles to Truck and Trailer Production and Distribution Russian-manufactured trucks are largely outdated in design and suffer from poor quality, Production. The output of the Russian truck which results in high downtime, costly repairs, industry fell by 15 percent in the first quarter of and poor fuel efficiency. The Russian automotive 1992 and demand fell by more than 80 percent. industry, aware of these problems, has started to While shortage of raw materials and components take advantage of new privatization laws by will not impact overall production as a result of 186 Chapter 9 Capacity of the Russian Truck Manufactring Industry by Class of Truck S*a Track Capaity - 2 Tohs. Befoe the collapse of tio CMEA tading arngements, the forme Soviet Union importd small tucks of up to 2 tons fiont East Germany (ROBUR), Poland D0) and Yugosavia (MV). According to MmINROM, production of light tucb is plnned as follows. -GAZ (Gorid Automobile aetory): Light tuks of 1.5 ton capacity; 75,000 units a year, but production is not expected to stS before 1995. -BAZ (Brianski Automobile Factory: Ught tnrbks of 1.5 ton capacity, designed by the British company lAD (nterational Automotive Design); production of 5W units to start in 1992 with aual production of 10,000 units by 1"4-95. -MOSKVITCH (Kranoareysk): light trucks of 1 ton capacity; production to stat in 1997. It is uncerain if these plans wil prove successful. Furter deay in production is anticipated because of the economic situalion of te outry. With background studies, the western automotive industry might be encouraged to invest in this segment because of the huge, unmet demand. LIht Tuhe - 2 to Toll Capcity. According to the Supreme Economie Council at the Presidium of the Supreme Council of the RSFSR, the Russian manawmctring industry covens 76 percent of the demand for this size truck. The balanoe of Russiandemand was suppliedby former CMEA countries,primatiy Poland, the formr Czechoslovakia, and the GDR. The shortage should be met in the ftimre by the Russian manufacturing industry by a change in mix, but that wil require an expansion of existing cacity. Medium Tnscks - S to 10 Ton Capacity. This size tflk was common in the former Soviet Union and suppied in large quantiies to the military. The S tD S ton segment covers 109 percent of the Russian demand, and it can be assumed that demand for medium sized trucks will decrease in favor of large/articulated bucks. Heavy Thctks - 10 o 15 Ton Capacity. Russian manufacturing covers 82 percent of demand for heavy trucks, with the balance coming fiom Czechoslovakia (LIAZ). Demand is expected to grow, especially for the 15 ton capacity models and other special models such as refigerator units, livestock rigs, and liquid tankers. One of the former Soviet truck factories, KamAZ, is situated in Tarwstan, which has separatist tendencies toward Russia. It is the most important production facility since most of the new, large diesel tucks were assembled there. The other CIS producers are MAZ (Belarus) and KrAZ (Ukraine). I eavy Trucks - Over 15 Ton Capacity. Because of the use of rail for long distance haulage in the past, very few heavy trucks were produced in Iis sector. As a result, Russian manufactring meets only about 89 percent of demand. The rdatively slow delivery by rain means a huge demand for this category, along with such special equipment as refrigerator units, container semi-trailery (silo) trailem for grain and cement. the fall in demand, the industry is not well and customers must be willing to accept the situated to meet future needs. The demand for existing quality. heavy trucks for long distance haulage is estimated Under central planning, both output and demand at 16,000 a year, with a 1.5 percent growth rate. were planned within the context of the Five Year The industry is short of cash, indebted to Russian Plan. Trucks and trailers were allocated under the suppliers and banks, and has difficulty getting control of Gosplan. The central planning system components from CIS suppliers without hard did not provide for such vital systems as sales currency. It does not have the capital to retool for organizations and customer service such as major model changes. Moreover, a devastating maintenance, repair, and parts. Customers must fire on April 7, 1993, that destroyed the KamAZ still arrange to pick up their vehicles at the Engine and Transmission Plant has dealt a severe factory, and may find the vehicles cannot be blow to Russia's productive capacity. In short, the driven away because of the lack of parts or industry is expected to produce, at less than components. The deficiencies in the distribution capacity, the same models it has for past decades, system have not yet been fixed and a deep distrust 187 Chapter 9 still exists between the manufacturers and their Zvezda Aviation Company, a subsidiary of the customers. Central Administration for International Air Only with technical and managerial help from Services, is an aircraft leasing firm that also western companies will Russian manufacturing be operates charter flights using Tu-154 equipment able to meet the urgent quality requirements exclusively. Another subsidiary, Russian expected by the buyers of trucks and trailers. 7he International Airlines, is using Airbus A-310 availability of modern diesel engines and equipment. Fortunately, the decline in demand for increased quality in vehicle electric and brake air travel resulting from higher fares means that systems are the most urgent needs. Russian there is substantial overcapacity in the fleet. This manufacturers will require capital to maintain means many of the oldest aircraft can be retired existing production lines and invest in new without replacement. machinery and licensing with western suppliers. Despite the shortage of aircraft available for Western truck equipment suppliers together with revitalizing the Russian fleet, many design bureaus their component production systems should be and manufacturers are active participants in a ideal partners provided the financial aspects can number of joint ventures to re-equip Russian be satisfied on both sides. Through these efforts, aircraft and to exchange technology with western the Russian truck manufacturing sector should be aircraft designer/manufacturers and manufacturers able to develop a capability to produce both of aviation equipment (avionics, air traffic control lightweight (I ton and under) and heavy (30 tons systems). and over) trucks, the critical capacity areas not Throughout the CIS, there are a number of now available in Russia. Filling this need through repair and overhaul facilities that specialize by imports from western manufacturing sources is not aircraft type, resulting in a maintenance practicable over the near term, given the number monopoly. In Russia, maintenance facilities are of vehicles and hard currency required. wanting: according to the civil aviation authority, only 19 percent of needed hangar space is Aviation. The exception to the CMEA practice available and only 30 to 35 percent have been of locating transport-related manufacturing and provided with adequate production areas. production facilities in countries other than Russia is in the area of aviation. All but two of the Shipbuilding and Repair Yards former USSR's design bureaus and production facilities are found in Russia, and one The Russian fleet is aging rapidly, and many ships manufacturer of aircraft components, the Chkalov are equipped with propulsion engines, engine manufacturer, is in Tashkent, Uzbekistan. communication facilities, and cargo handling gear The Russian aircraft fleet is aging, obsolete, and that reflect technologies of the 1960s. These on the verge of wearing out. Dozens of aircraft circumstances cause low productivity and reduce orders for the 11-86, Tu-154M, and the Yak-42 asset reliability. Individual ships have to spend an have gone unfilled. Other slips in the production increasing number of days each year in repair and and delivery schedules of Tu-204, 11-96-300, maintenance yards. Assuming continuation of the which are twice as economical in terms of fuel demand for Russian vessels, officials estimate that efficiency compared to the Tu-154 and the 11-62, about 500 vessels of the Federation's merchant respectively, and 11-114 aircraft are compounding marine would have to be replaced during the next the situation. There is also a severe lack of spare three years. Much of the remaining older tonnage parts and engines, especially for the 11-62M, Tu- needs to be technologically upgraded. The annual 154M, Yak-42, and the 11-86. requirement for vessel overhaul and repair will be To remedy this demand for aircraft, the equivalent to 3.5 to 5 million dwt of diverse types purchase from Poland and the Czech Republic of of tonnage. 11-62 and Tu-134 aircraft with remaining service Thirteen major shipyards that specialize in life, as well as the transfer of military versions of building and repairing merchant vessels remain the 11-62, Tu-154, and 11-76 to civil aviation under the Russian Federation's jurisdiction. operators is being negotiated. The Zolotaya Russia's national flag carriers are skeptical about 188 Chapter 9 these yards' reliability and their ability to provide Cargo Handling Equipment services and manufacture hardware to meet the individual carriers' technical requirements. As a In most Russian facilities where cargo is handled consequence, a growing portion of Russian new - ports, airports, railway terminals, intermodal shipbuilding orders are being placed with foreign transfer points and warehousing complexes - the yards. Russian carriers are equally skeptical required equipment park is overaged. For regarding the ability of Russian shipyards to instance, in the Federation's ports almost one- undertake vessel overhaul and repair. The time to third of all gantry cranes have been in service for complete such jobs in Russian yards significantly more than 20 years and are now in a condition of exceeds that in west European yards for similar advanced deterioration. Over 50 percent of the orders. Furthermore, Russian carriers reported forklift fleet and yard tractors are more than six that the cost of such jobs in domestic yards was years old. These items are literally worn out, between 30 to 40 percent higher than in foreign require constant repair work, and are only yards. available for cargo handling 35 percent of the time. Similar situations prevail in all other The Russian yards, faced with declining segments of the Federation's freight transport business and a need to generate foreign exchange system. income, are increasingly devoting repair and A particular problem is caused by the limitation building capacities to orders from foreign of indigenous capacities to manufacture required shipowners. These pressures are leading to joint replacements. This limitation results from ventures with foreign shipyards eager to combine industrial specialization arrangements that existed relatively inexpensive but skilled Russian among the former CMEA countries. For instance, shipbuilders with modern technology. Such cargo handling equipment and special steel for ventures should be encouraged because the payoff sheetpiling - two items of most urgent need in could be substantial. Russian ports - were manufactured in other The Russian yards have a theoretical maximum CMEA countries. Under today's altered capacity of 625,000 compensated gross tons (cgt), conditions, foreign exchange is required to the internationally common denominator for yard purchase such items. At present Russia's industry capacity, which represents about 3 percent of the can meet no more than 20 percent of the demand current global shipbuilding capacity. At a for new equipment and spare parts for equipment worldwide average of US$2,500/cgt, the rehabilitation and upkeep. In addition, the production potential of Russian Shipyards domestic industries' line of production is represents possible annual earnings of US$1.4 technologically outmoded and expensive to billion. Shipbuilding is an assembly industry with operate. Because of these system constraints, a linkages to steel production and equipment component of teh Bank's first loan to Russia (Ln. manufacturing. Based on international experience, 3513-RU, the First Rehabilitaiton Loan) included the split in activities between yards and their provisions for acquiring up to US$50 million of supplies is about 40:60, which would mean that port cargo handling equipment for several of about US$850 million worth of business would Russia's ports of national significance. accrue to other domestic industries. Foreign manufactures of cargo handling equipment have become aware of the excessive None of these earnings will materialize, demand, and the national industries' inability to however, if Russian shipyards are not able to meet such demand. Some initiatives have already build ships suitable to the demands of today's been taken to establish joint production shipowners in an efficient manner. Shipyards arrangements with local manufacturers. Several seeking to be restructured and privatized should domestic firms have applied for licenses from be encouraged to do so, possibly, with foreign specialized manufacturers. The Government support through such measures as the government estimates that the total cost of World Bank funded Privatization Implementation required replacement and rehabilitation of essential Assistance Project. cargo handling equipment throughout the 189 Chapter 9 Federation is presently on the order of US$1.3 overall design of a safety program, but the billion. Moreover, ports, airports, railways and program has not yet been tailored to Russian other international intermodal ports have the conditions. There are no programs to identify and potential to earn foreign currency and the improve particularly dangerous "black spots" on possibility of replacing old Russian cargo handling roads, develop appropriate safety standards in equipment with more reliable and efficient foreign vehicle design or vehicle inspection, ensure proper made equipment. Assuming that productivity of vehicle maintenance, or educate the public on the port operations is likely to improve greatly with need to wear safety belts. privatization, however, these replacements needs are probably severely overstated. Inland Waterways Roads and Highways The Krasnoyarsk Shipyard manufactures river-sea dry cargo ships, platform barges, sectional oil The CMEA structure left Russia without the tanker barges, and extended platform barges. The capacity to manufacture asphalt spreaders. The shipyard's major customers are the Lenskiy only producer in the USSR was situated in Association and the Enisey River Shipping Ukraine, and it produced only 500 units annually. Company. They are interested in obtaining barge- Russia is in the process of creating a domestic carrying ships, non-self-propelled tourist and production capability and expectations are that 400 passenger vessels, floating shops, and self- to 500 units will be produced annually by 1995, powered bilge collectors. Delivery of the which should satisfy demand. prototype river-sea dry cargo ships, which required some modernization of the production Even when road construction and maintenance facilities, is scheduled for 1993-1994. procedures are automated, the poor design of road The production of many types of domestically- maintenance equipment means that even after road manufactured equipment has been discontinued rehabilitation, road roughness levels are high, and spare parts have become unavailable. Despite resulting in high vehicle operating costs, and there comparatively low productivity, all river shipping is premature cracking of the pavement. Key items companies involved in river-sea transport report a of equipment will have to be replaced by imported need for expansion of the river-sea fleet capacity. equipment, or Russian-made equipment will have In spite of excess local shipbuilding capacity, to be redesigned. Either option requires river-sea craft appear often to have been imported considerable investment that is not likely to be from Poland, Hungary, Yugoslavia, and the available for the next few years. Consequently, former GDR, or to have been built on locally- road maintenance will continue to depend for the manufactured hulls and fitted out with imported most part on Russian made equipment. propulsion units, electronics, and equipment from abroad particularly from Poland or GDR. Road equipment - traffic signs, guard rails, etc. - are generally scarce and in poor condition, Evolving Requirements for the Transport particularly outside the approaches to urban areas. Equipment Manufacturing Industry There are few road signs, and they are often poor. A 1991 survey of a 20,000 km sampling indicated Near-Term. The state should withdraw from the that 65 percent of required barriers, 10 percent of manufacturing sector and should allow private traffic signs, and 86 percent of road markings sector manufacturers to determine the market were missing. The production capacity for demand for future transport equipment, rather reflective film used in making road signs is than fostering the development of additional state- insufficient and the quality poor. Consequently, owned manufacturing installations.8 Modernizing the film often has to be renewed annually.7 A existing manufacturing facilities and technologies Western manufacturer has established a factory for will take considerable investment, time, and producing road signs, traffic light sets, and other effort. That is best done by market forces in a road furniture and is assisting FHD with the contested free market rather than by vertically- 190 Chapter 9 integrated state-owned transport equipment generated by the sale of locally-produced natural manufacturers. resources. Within this new context, the current crisis in meeting selected transport equipment needs can be Russian manufacturing processes are in need of confronted in part by the restoration, across more modern technology simply to cope with the international or inter-republican boundaries, of increasingly more demanding requirements of previous supplier relationships on a commercial Russian transport operators. When the economy basis rather than on the basis of the old barter rebounds, they will be faced with the need to system. Taking this step, however, is not likely to produce more transport service with less - but address effectively the technological deficiencies better - transport equipment. Present domestic that plague the sector's equipment base. Tapping capabilities are simply not sufficient to meet these the resources of the military-industrial NPOs demands. Solutions to meeting the equipment seeking to diversify their production base could needs of Russian transport depend in the mid- to provide access to more affordable technological long-term on an effective process for integrating enhancements in the near term. critical elements of foreign technology into For more urgent problems, such as those in Russia's domestic manufacturing processes. urban transport, measures to extend the effective Because this is such a difficult situation, foreign service life of existing fleets should be examined firms entering the Russian market should be able as a near-term alternative to procurement of new to take a long-term view and be capable of equipment. A variety of activities of this sort - withstanding losses in the early stages of their some well-advised and some not - are underway ventures.9 in various transport modes throughout the former CMEA. For example, Russian-manufactured Conditions for Reform locomotives owned by the railways of the GDR are now being repowered with western- There is a broad consensus among western firms manufactured engines. Discussions are underway operating in the former communist countries that concerning the outfitting of Russian aircraft with the difficulties of establishing and operating joint western avionics and engines. Estonian Railways ventures in Russia are substantially more onerous are actively seeking to repower their aging DMU than in Eastern Europe. In a recent survey of fleet with western-manufactured engines. And the western businesses operating in the region, 63 World Bank's proposed Urban Public Transport percent of respondents rated the FSU as Project is looking at options for repowering with presenting the greatest obstacles to successful new engines the Hungarian-manufactured city bus business dealings. fleet of several Russian cities. For cooperation with foreign manufacturers to be effective, it must be honest and reciprocal, Medium and Long-Term. Proposed and ongoing with full respect and compliance given to existing measures to address the transport equipment crisis international agreements and norms concerning in the near term make clear the need to attract respect for ownership of intellectual property. western investment to modernize Russian industry. Russia must also develop a financial and legal This has been recognized not only by Russian framework that protects investors and financiers, reformers but also by Russian industrial interests, so that their investments and their property are who in practice have genuine reservations about secure within the context of normal business risks. the impact of foreign investment in their own spheres of operation. Until unrestricted currency Notes convertibility and properly functioning capital markets are introduced, however, both foreign and 1. Translation of Anatoliy Tkachenko, "The domestic investment in industrial modernization in Railways Attempt to Reduce their Losses," European Russia is less likely to occur than is Moskovsldye Novost (No. 51-52) 20 December investment in the resource-rich areas, particularly 1992, p B-8 under "Railway Activities Siberia, where hard currency profits will be Highlighted: Preventing Financial Losses," 191 Chapter 9 Central Eurasia (FBIS-USR-93-009) 27 January Final Report, (COWI-TECNECON Joint Venture, 1993, pp 71-72. July 1992), p 28-29. 2. Translation of V. Grechanin, "From 'Energiya' 8. Re: privatization of Uralmash, the Ural Heavy to a Passenger Railcar," Gudok, 20 February Machine Building Plant (UZTM), see a translation 1993, pp 1-2 under "Former Defense Plant to of Boris Alekhin's "A Joint-Stock Company Produce Railcars," Central Eurasia (FBIS-USR- Cannot be Formed Without Help from the Top," 93-029) 12 March 1993, pp 51-53. Nezavisimaya Gazeta (Moscow: 6 November 1992), p 4 under "Uralmash Plans Conversion 3. Translation of an interview with Vladimir into Joint-Stock Company," Central Eurasia Savelyevich Vernik by A. Tashbulatov, "Tank (FBIS-USR-92-152) 27 November 1992, p 11. Cars Through Conversion," Gudok, 29 January 1993, p 2 under "Ural Tank Plant Produces Re: privatization of ZIL, see RFE/RL Daily Special Railcar Assortment," Central Eurasia Report (No. 43), 4 March 1993. (FBIS-USR-93-026) 6 March 1993, pp 49-50. Re: privatization of AvtoVAZ, the Volga Motor 4. "Just Statistics," Za Rulem, No. 12 (Moscow: Vehicle Plant built by Fiat, see a translation of December 1991), pp 6-7. English translation: Vladimir Kadannikov's "What is Good for VAZ "Motor Vehicle Statistics Detailed," Central is Good for Russia," Delovoy Mir (Moscow: 4 Eurasia (FBIS-USR-92-023), 5 March 1992, pp November 1992), pp 1, 7, under "Auto Plant 96-99. Economic Status Examined," FBIS, Central Eurasia (FBIS-USR-92-167) 31 December 1992, 5. R. Asatryan, Avtrokon Concern, "Bus pp 43-6, and Sergey Zhigalov, "Who Will Own Production Today and Tomorrow," Avtotransport the VAZ? The Largest Auto Works in Russia Kazakhstana, No. 11 (Almaty: November 1991), Becomes a Joint-Stock Company," an interview pp 1-3, 35. English translation: "Bus Production with Vladimir Kadannikov, general director of the Highlighted," Central Eurasia (FBIS-USR-92- Volga Auto Works, Izvestiya (31 December 1992, 023), 5 March 1992, pp 102-105. Morning Edition), p 2, translated as "Auto Plant Director on Privatization" in FBIS, Central 6. Ministry of Industry Official, World Bank Eurasia (FBIS-USR-93-010) 29 January 1993, pp Mission findings, Moscow, RF, 3 November 37-8. 1992. 9. "RUSSIA: Joint Ventures." Oxford Analytica, 7. EBRD, Roads and Road Transport Study Draft East Europe Daily Brief. January 20, 1993. 192 Annex A Statistical Summary of Transport Demand Forecasts Exhibit A-1 Energy Related Domestic Exhibit A-2 Non-Energy Related Domestic Transport Demand, 1980 to 2015 Transport Demand, 1980 to 2015 (billion Ntkm) (billion Ntkm) Low Medium High Low Medium High 1980 3,061 3,061 3,061 1980 3,071 3,071 3,071 1985 3,683 3,683 3,683 1985 3,448 3,448 3,448 1990 4155 4155 4155 1990 3,432 3,432 3,432 1991 3,919 3,919 3,919 1991 3,200 3,200 3,200 1992 3,567 3,567 3,567 1992 2,508 2,508 2,508 1993 3,521 3,521 3,521 1993 2,248 2,338 2,338 1994 3,496 3,496 3,552 1994 2,006 2,248 2,459 1995 3,481 3,481 3,680 1995 1902 2,274 2,587 2000 3,645 4,006 4,553 2000 2,235 2,754 3,310 2007 4,164 5,023 6,109 2007 2,582 3,441 4,522 2015 4,911 6,254 8,962 2015 2,975 4,215 6,065 Source: EBRD Rail Sector Survey. Source: EBRD Rail Sector Survey. 193 Annex A Exhibit A-3 Domestic Freight Transport Demand and Its Relation to GDP Growth Rates Freight Task (bn ntkms) Energy GNP Year Energy Non-Energy Total (1) Output ( Index ° 1970 1,337 2,121 3,458 17.8 56.1 1975 2,094 2,830 4,924 22.8 67.4 1980 3,061 3,071 6,132 27.6 76.9 1985 3,683 3,448 7,131 31.0 89.9 1990 4,155 3,432 7,587 33.3 96.0 Annual growth rates (percent per year.) 1970-80 8.6 3.8 5.9 4.5 3.2 1980-90 3.1 1.1 2.2 1.9 2.2 1970-90 5.8 2.4 4.0 3.2 2.7 1. Excludes overseas shipping 2. Million barrels per day of oil equivalent 3. 1989 = 100.0 Source: EBRD Rail Sector Survey. Exhibit A-4 Non-Energy Freight Task by Mode (billion tkm) Low Growth Medium Growth High Growth Year Rail Road Other Rail Road Other Rail Road Other 1990 2,631 471 354 2,631 471 354 2,631 471 354 1991 2,461 441 298 2,461 441 298 2,461 446 293 1992 1,925 350 233 1,925 350 233 1,925 358 225 1993 1,723 317 208 1,792 330 217 1,782 341 215 1994 1,534 286 186 1,720 320 208 1,857 378 225 1995 1,452 274 176 1,735 353 210 1,934 419 234 2000 1,663 371 201 2,034 474 246 2,336 691 283 2007 1,858 500 225 2,417 732 292 2,854 1,324 345 2015 2,050 677 248 2,774 1,105 335 3,171 2,511 383 Source: EBRD Rail Sector Survey. 194 Annex B Compilation of Primary Transport-Dependent Industry Economic Forecasts for Railways and Waterborne Transport Economic Planning Regions and Production The purpose of this section is to briefly review the main trends and anticipated development The territories of the former USSR were divided patterns for the major commodity flows of Russia by Gosplan into twenty Economic Planning and the CIS. The relative strength of the industries Regions. Russia has inherited eleven of these and activities which generate these commodity regions, Ukraine three, and one each for Belarus flows are of relevance both to the strength of the and Kazakhstan. The boundaries of the economic economy as a whole and to the transport sector. planning regions always coincide with those of the The impact of the reformation and restructuring republics, but only coincide precisely with railway process in the various sectors will be of borders in the case of Belarus. In Russia, a considerable significance in setting transport distinction was made between the Siberian and Far demand influences for the future, whether in East regions, and those regions west of the Urals. terms of cargoes through ports, as coastal and/or This placed three economic planning regions in transshipment traffics, as sea-river traffics, as rail the Siberian and Far East category and the traffic, or as pure inland waterway traffics. remaining eight regions in the European category. The two most important sectors in the CIS are Exhibit B-I summarizes the main activities of each agriculture and energy. In agriculture, grain is the economic planning region and the railways by dominant product, although the CIS is a net which they are served. importer. In the energy sector, oil, gas and coal For Soviet economic planning purposes, are the prime commodities. Further, iron ore, European Russia consisted of the Northern, steel products and timber are major commodities North-Western, Central, Volga-Viatski, Central for the waterborne and rail transport sectors alike. Black Earth, Volga, Northern Caucuses, and Ural planning regions. Siberia and the Far East Sectoral and Regional Changes contains the Western Siberian, Eastern Siberian, and Far East planning regions (exhibit B-2). Coal. Coal production levels fluctuated during the 1980s, with an overall decline in the decade. Transport demand in the FSU has generally Production will continue to decline because of the followed economic growth patterns. For the short replacement of coal by gas, reduction in steel to medium term future, demand determinants will production, the ending of subsidies, increasing continue to reflect overall economic developments extraction costs and environmental concerns. In for domestic inland traffics and for international 1988 only 32 out of a total of 564 mines and pits flows. Individual commodity flows will, however, operated without state subsidies; 245 required strongly influence the pattern and volumes of subsidies of more than 50 rubles per ton and 200 cargo movements through the seaports. subsidies of over 100 rubles per ton, against an 195 Annex B Exhibit B. 1 Characteristics of Economic Planning Regions Population Region Coverage (million) Economie Activity Railway Northern Arkangelsk, Vologda, and 6 Lumber, timber, and other raw Northern and October Murmansk oblasts. Komi and materials; coal from the Pechorsk Karelian ASSRs Coal Basin. North Western St. Petersburg (Leningrad), 8 Machinery, shipbuilding and power October Novgorod, and Pskov oblasts plant equipment (St. Petersburg 4.6) Central Moscow, Briansk, Vladimir, Tver, 30 Textiles, chemicals, and automobile Moscow, October, Kaluga, Kostroma, Orel, Riazan, assembly. Northern, Gorki, Smolensk, and Yaroslavl oblasta Kuibyshev, and (Moscow 9) South-East Volga-Viatski Nizhegorod and Kirov oblasta and 8 Phosphorus, construction material Gorkiy and Kuibyshev the Chuvash, Mordovski, and minerals, and processed Marinski ASSRs timber/lumber. Volga Tatar and Kalmyk ASSRs and the 16 Petroleum refining and automobile and Kuibyshev, Volga, Ulianov, Penzensk, Samara, truck manufacturing (VAZ and Northern Caucasus, Saratov, Volgograd, and Astrakhan KamAZ respectively). and South-East oblasts (70 percent urban) Ural Sverdlovsk (Ekaterinburg), 20 Ferrous metals, teel and steel pipes, Sverdlovsk, Southern Cheliabinsk, Perm, Kurgansk, and aluminum, metallurgical supplies, and Urals, Kuibyshev, Orenburg oblasts and the Bashkir petroleum. Gorkiy, and Western and Udmurt ASSRs Siberia Central Black Earth Belgorod, Voronezh, Kursk, 8 Iron ore and agriculture (flour, sugar, South-East, Moscow, Lipetsk, and Tambov oblasts vegetable oil, dairy products). Southern, Volga, and Kuibyshev Northern Caucasus Rostov oblast, the Krasnodarsk and 16 Agricultural tnachinery, electric Northern Caucasus, Stavropol districts, and the locomotive, and shipbuilding South-East, Donetsk, Kabardino-Balkarski, North manufacturing plants, and agriculture. and Volga Ossetian, Chechen-Ingush, and The region's agricultural production Dagestan ASSRs accounted for 10 percent of the former USSR's total output. Western Siberia (South) Omsk, Novosibirsk, 14 Coal (from the Kuzbass), petroleum, Western Siberia, Kemerov, and (the southern part of lumber, ore, salt, chemicals, and Kemerovsk, the) Tomsk oblasts and the Altai railway ballast. Krasnoyarsk, district. Southern Umals, (North) Tyumen and (the larger Sverdlovsk and part of the) Tomsk oblasts Tselinnaya Eastern Siberia Krasnoyarsk district, the Tuvinsk 9 Coal (45 percent of the former Krasnoyarsk, Eastern and Buriatsk ASSRs, and the USSR's reserves), non-ferrous metals, Siberia, Transbaikal, Irkutsk and Chitinsk oblasts asbestos, magnesium, iron ore, and BAM metallurgy, chemicals, lumber/timber, and paper mills. Source: EBRD Rail Sector Survey and Waterborne Transport Sector Surveys. average price of 15 rubles per ton and an fields (notably the Moscow Basin) will close. The equivalent world price of around 30 rubles per Kuzbass field is the most important and cheapest ton. in Russia, but is located far from the smelters With the exception of Neryungri coal from located in Magnitogorsk, European Russia and the Eastern Siberia and the Kuzbass fields, Russian Urals. Production dropped by 20 million tons (12 production will continue to decline and some percent) between 1988 and 1990 and will continue 196 om Mm ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ri IBRD 25154 0 0 | 6 MOXLDOV A t 't N|U Ur) CNTRAL r( c. t O.A <1' f '1 RUSI LADRATOUS EARS.> KANEh'1 KZKSTNE:.'- 0 s~~~~~~~~~O k. - _ _ ~ ,% , - a I k -~ URAL 1Z AZERBAIA KAZKHTA RUSSIA FEDERATION BELARUS UKRAINE KAZAKHSTAN ::: - ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~SEPTEMBER 1993 Annex B to decline for some years as reductions in military * a decline in demand from heavy industry expenditure and technological and structural and power sectors. changes in the consuming sectors reduce demand. Domestic demand is particularly influenced by Some efforts are underway to find export markets lower steel production. Also exports are declining via Novorossijsk. Japan may also be potential (exhibits B-3 and B-4). Likely future trends in market for Russian coal. exports are unilateral concentration on former centrally planned economies in Eastern Europe Other coal basins in Russia include the Pechora will decrease, and exports from the Far-East to Basin, above the Arctic Circle, the Moscow the Pacific Region will increase. Basin, Kansk/Achinsk Basin and Neryungri. The Pechora basin produced 25 million tons of coking Whether the overall export potential of the CIS coal in 1990 (20 percent down on 1988). It serves can be maintained is an open question, also for the St. Petersburg region and Baltics and is the the international Energy Agency. Both production main source for Cherepovitz steel works. Only 10 and transport of coal have been heavily percent of the St. Petersburg region output was subsidized, directly and indirectly, in the USSR. military but the Cherepovitz mill may be Very few coal fields have been able to operate converted to a mini-mill powered by natural gas. without any state subsidy at all. Of the 564 coal Overall, production is expected to continue to mines, 200 required subsidies of over RblOO per decline, to perhaps 20 million tons a year, with ton of product, which is currently "sold" to the future growth dependent on the steel mill. state at some 70 rubles per ton [Moscow limes, Production from the Moscow Basin has declined June 17, 19921. If the subsidies were removed, from 36 million tons in 1970 to 10 million tons there would be a significant reduction in output, currently. It produces low-grade coal and is likely at least in the older mines. On the other hand, the to be phased out. The Kansk/Achinsk Basin removal of the coal export monopoly in 1989 produces low-grade coal used by regional power gives some new opportunities for the more plants. The Neryungri Basin produces 13 to 16 modern mines to consolidate production in part million tons of high-grade coking coal for local for domestic markets and leaving the balance for and export markets, with generous subsidies, of export. which 2 to 5 million tons a year is exported to It is uncertain whether exploitation from the Japan; production is expected to remain stable. centrally-located fields for export to either Europe Coal is an important waterborne transport or the Far East is commercially viable if real cost commodity for inland water transport (17.2 of production and transportation are taken into million tons in 1990), for Russian cabotage trades account. The inland transportation distances for (4.7 million tons in 1990) and for port traffic (44 Russia are significant. Note, moreover, that the million tons of imports and exports in 1990). world-market outlook is not entirely favorable for the CIS: other major competitors in foreign trade The mining and domestic utilization of coal has of coal (Australia, the United States and South been both a significant domestic industry and Africa for hard coal and Australia and South consumer energy source and export commodity in Africa for steam coal) face much lower production the past. The outlook for coal, however, is not so and inland transport costs for the exports. certain. Coal production has dropped by 20-30 Competition from Indonesia, Venezuela and percent since 1989 with overall production down Colombia is also increasing. Current spot export by 20 million tons between 1988 and 1990 in prices are in the order of US$x38/ton fob Russia, by 29 million tons in Ukraine, and 11 Hampton Roads, USA; US$x27/ton fob Richards million tons in Kazakhstan. These decreases are Bay, South Africa and US$x26/ton fob Port due to the main structural trends, notably: Kembla, Australia. CIS-based exports will need to * extraction becoming more difficult and at least match or undersell these rates, which are costly; inclusive of production, transport and loading to * shifts to alternative fuels, particularly gas; vessel at the export port. 198 Annex B The expected overall impact on waterborne may show some increase but total demand from transport can be split between domestic, cabotage these areas is comparatively small, a total of 12 to and port traffics. With the exception of cabotage 14 million tons annually. trades (where the supply is primarily dictated for input to relatively remote areas for heating and Coal production in the Donets Basin in Ukraine, other mainly non industrial energy purposes), the is reported to be relatively costly. Output for outlook is for a further decline of overall volumes domestic and export markets is expected to decline during the next few years. This will be by up to half by 2007. particularly so for the inland waterway sector, Kazakhstan does not have any significant export where the downturn in economic demand and trades and the main production areas, (Ekibastuz predicted closures of mines is likely to lead to a and Karaganda, supply relatively low grade hard situation where volumes will not exceed the 1990 and steam coals. Most importantly, they are level (17.2 million tons) until 2007. located a considerable distance (2,000 to 2,300 km) inland from port and shipping outlets on the For port throughput, the outlook is for a less Caspian or Black Seas. significant decline followed by a slow recovery. Steam coal and coking coal exports to Japan and Oil and Gas. Overall, production will level off Asia are expected to remain relatively stable when or decline slightly because of the depletion of the exports to Eastern Europe and other European supergiant fields, the location of new fields in countries are expected to undergo more significant more remote and severe regions, shortages of change. Markets in the Middle East and Africa equipment, increasing production costs and Exhibit B.3 World Coking Coal Trade, 1990 (million tons) Importers North OECD South Africa & Former Exporters America Europe Japan America Asia Middle East CPEs Baltics World Canada 0 2.7 17.5 1.3 5.5 0.3 0 -0.4 26.9 USA 4.5 27.3 9.6 5.9 3.3 1.1 2.6 3.3 57.6 Australia 0 9.8 29.6 1.6 14.1 0.9 1.6 -0.7 56.9 other OECD 0 3.3 0.2 0 0.1 0 0.1 0.7 4.4 OECD 4.5 43.2 56.9 8.8 23.0 2.4 4.3 2.6 145.7 Poland 0 3.8 0 2.2 0.4 0 1.0 0 7.4 USSR 0 1.8 5.5 0 0 0 12.1 0 19.4 China 0 0 1.3 0 0 0 2.7 0 4.0 Colombia 0 0 0 0 0 0 0 0 0.0 South Africa 0 0.2 3.4 0 0.9 0 0 0 4.5 other non-OECD 0 0.8 0.3 0 0 0 0.9 0 2.0 TOTAL 4.5 49.7 67.3 11.0 24.3 2.4 21.0 2.8 183.0 CPE = centrally planned economy. Source: EBRD Rail Sector Survey and Waterbome Transport Sector Surveys. 199 Annesx B Exhibit B.4 USSR Hard Coal Exports by Destination (million tons) Year 1982 1983 1984 1985 1986 1987 1988 1989 1990 Hard coal 22.5 24.3 26.3 28.0 31.8 35.5 39.4 39.8 38.5 Cokingcoal 10.4 8.7 8.1 11.2 12.8 19.4 28.4 19.7 19.3 Exports to: Austria 1.0 1.2 1.1 1.0 1.2 1.2 1.3 1.3 0.6 Belgium 0.1 0.1 0.1 Finland 0.3 0.5 0.5 0.5 France 0.1 0.1 Germany 0.2 0.4 0.3 0.3 0.2 0.3 0.2 Italy 0.1 0.1 0.1 0.2 0.1 0.2 0.1 0.1 Japan 1.1 1.5 1.6 2.8 4.2 5.2 5.2 5.5 5.5 Spain 0.1 Sweden 0.1 0.1 0.1 Total OECD 23 3.0 3.4 4.4 5.8 7.1 7.4 7.8 7.2 .............................................................................................................................................................................................................................. East Europe 6.3 4.4 4.4 3.9 4.7 9.5 10.2 8.9 12.1 other non-OECD 1.8 1.3 0.3 2.9 2.3 2.8 2.6 3.6 Steam coal 12.0 15.6 18.2 16.7 19.0 16.1 20.5 21.2 19.1 Exporus o: Austria 0.1 0.2 0.1 0.1 0.2 0.1 0.1 Belgium 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 Denmark 0.1 0.4 0.3 0.3 0.6 0.8 0.9 0.9 1.1 Finland 0.8 0.9 0.9 0.9 1.6 1.9 1.8 1.7 1.9 France 0.2 0.1 0.1 0.1 0.2 0.7 0.8 Germany 0.3 0.3 0.3 0.5 0.5 0.3 0.2 0.3 0.2 Greece 0.3 0.3 0.1 0.1 0.1 0.2 0.3 Italy 0.1 0.1 0.2 0.2 0.1 0.3 0.3 0.4 0.4 Japan 0.2 0.5 0.9 1.0 0.9 1.0 2.1 2.5 2.9 Spain 0.1 0.1 0.2 0.3 0.3 Sweden 0.2 0.2 0.3 0.4 0.6 0.4 0.5 0.6 0.6 UK 0.1 0.1 0.1 0.1 0.4 0.2 0.5 Total OECD 1.9 2.9 3.8 3.8 4.7 5.3 6.9 8.4 9.4 .............................................................................................................................................................................................................................. East Europe 9.8 11.2 10.5 12.7 14.0 10.7 12.3 10.7 9.7 other non-OECD 0.3 1.5 3.9 0.2 0.3 0.1 1.3 2.1 Source: EBRD Rail Sector Survey and Waterborne Transport Sector Survey. 200 Annex B decreasing subsidies. However, the export market 0 Oil production has actually decreased during will remain strong. Future production capability the 1980s. For example, the largest producing will depend on international investment and region, western Siberia, had peak output in 1988 technological modernization. Transit and other of 8.28 million barrels per day, declining to 7.5 legal issues will become increasingly important as million in 1990, and some 6.5 million in 1991. provinces and regions stake their claims. * Production, transportation and refinery There are 51 operating refineries (exhibit B-5). capacities are inefficient. Total throughput in 1989 was 472 million tons, * Health, safety and environmental aspects are with output static during the 1980s. Over 90 generating resistance to further exploitation. percent of crude oil comes to refineries via * Energy wastage is alarming, the ratio pipeline, and refinery location reflects oil field between the energy consumption and the GNP history. being four times as high as in Western Europe. Russia possesses ten oil-refining regions, of 0 Domesticresourcesavailableforinvestments which the Volga and Urals regions are the most are decreasing. Most oil production hardware has important, together accounting for 25 percent of been manufactured by plants in Azerbaijan, with total production. The Volga has been the top the consequence that most equipment delivery has refining region of the FSU since the early 1960s, effectively halted over the past year. almost without exception, and in 1989 throughput Modernization of production, and transport of totalled 62 tons, down from a peak of 71 million oil and coal industries will take considerable time. ton in 1980. Only one of the five Volga refineries A series of domestic energy price increases and has experienced a rise in output over that time. efficiency measures in production and The Urals have historically been the second region consumption will temper growth of internal in FSU but output has fallen through the 1980s demand. On balance, export potential would and now is only 52 million tons. appear to be rather stable or increasing. The main Next to agriculture, energy is the most difficulty in evaluating future export volumes is important sector in the CIS economy. This with the impact of plans in hand, or still under comprises coal, oil and natural gas and the negotiation, with foreign firms, and the extent to immediate energy products derived from these raw which output will be dedicated to export markets materials. Valued at world market prices, the for refined or crude oil. 1990 output equalled US$240 billion or 15 percent In the short to medium term, Ukraine authorities of the CIS' GNP. plan to import crude and refined products directly Energy is estimated to account for 60 percent of from the Middle East, rather than remain hard currency earnings. The CIS is still the largest dependent on Russian crude oil supplies and local producer of energy in the world. In view of CIS' refining capacity. increasing needs for imports, a sustained level of Various sources expect that in total energy energy exports will remain essential. However, production, consumption and exports, the share of there are several factors which indicate that the natural gas will steadily increase, and the outlook for sustained or increased production may production of oil and coal will only slowly be more pessimistic over the short and medium recover from the present downfall. Practically all term. These are: gas transport, including exports, is by pipeline. * The cost of exploitation has been rising and will continue to increase in real and relative terms Iron Ore. CIS output has declined since the as a reflection of the depletion of easily accessible 1988 peak, and is continuing to decline. A drop in fields. domestic demand is due to reduced steel * The increasing age of wellhead and production, and production will continue to shrink associated equipment operated in harsh conditions. unless foreign markets can be developed. * Increased costs associated with deeper wells In Russia, republic-wide output peaked at 109 and the need to bring a larger number of smaller million tons in 1988, but dropped to 107 million fields into production. tons by 1990. Production for the period to 1997 201 Annex B and beyond will be closely linked to domestic demand for steel and the ability to develop new Exhibit B.5 Major Oil Refineries in Russia markets. The main field is the Kursk Magnetic Anomaly, which has 100 years' of reserves and Throughput provides ore for steel centers in Moscow, Novo- Region Refinery (million tons) Lipetsk, and Magnitogorsk in the southern Urals. Volga Kuibyshev 30 Domestic demand for Kursk ore will drop as Syzran 10 south Urals mills decline. Any export market will Volgograd 9 depend on exporting ore either via Black Sea ports Nizhekamsk 8 or by rail to Europe. Demand for Bratsk ore will 5 continue from the Siberian Novokuznetsk mill, Saratov which supplies products to North and East Siberia. The Kola/Karelia field produces 21 million tons of Urals Ufa 30 ore annually, of which Karelia supplies 11 million Ishimbay-Slaavat 9 and Kola 10 million. The fields serve the Perm 9 Cherepovets works near St. Petersburg, which Orsk 4 will continue to supply the machine building industry in St. Petersburg and the Baltics. Central Ryazan 20 The production of iron ore in Russia has fallen Yaroslavl 12 steadily since it peaked at 109 million tons in Moscow 11 1988. Ukrainian output peaked at 125 million tons in 1980 - 105 million tons were produced in East Siberia Angarsk 23 1930. Kazakhstan has two fields which produce Achinsk 8 some 25 million tons annually. The decline in West Siberia Omsk 25 Russian and Ukraine areas is mainly due to a Volga-Vyatka Novogorkiy 23 reduced domestic demand from steel production. North Ukhta 1 However, exports are also declining. The trend in North West Kirishi 22 ores and steel production is a reflection of macro-economic performance. Nor Caucasus Oroynyy 13 Steel. The majority of steel mills are based on Tuapse 1 outdated open-hearth technology and many plants Krasnodar 1 are highly inefficient and polluting. A very large volume of steel scrap is generated by inefficient Far East Komsoloslsk 5 manufacturing processes. Per capita steel Khabarovsk 4 consumption in the FSU has been up to 2.5 times higher than in the United States. Three smaller Total Russia 283 and more efficient mini-mills using scrap metal are already in production. Increased efficiency Source: EBRD Rail Sector Survey and Waterborn from alternative, lighter metals, technological Transport Sector Survey. improvements and improved industrial practices will minimize waste and exert a downward pull on demand. Decreased orders from the military will 1991. Steel production will continue to decline also reduce consumption, and it is likely that each and may never recover to 1988 levels. There are republic will develop its own self-contained steel three major steel-producing regions in Russia, of industry. which the Urals (42 million tons in 1991) is the Russia produces two-thirds of all steel produced largest with four major plants. Urals steel serves in the CIS. Output peaked at 94 million tons in the Ural machine-building industry, particularly 1988 and declined to around 78 million tons in the Uralmash complex in Ekaterinburg, but 202 Annex B around 200 million tons until 2000. The CIS will Exhibit B.6 Major Russian Steel Plants remain a major grain importer. Throughput In Russia, production fell sharply from 127 Plant (million tons) million tons in 1990 to 89 million tons in 1991. If investment and restructuring occur, the 1990 Magnitogorsk 16 production levels could be regained by 1997, after Nizhniy Tagil 8 which significant increases could occur. The main grain producing areas are in the lower Volga and Chelyabinsk 7 Kuban, the southern Urals, parts of western Novotroitsk 3 Siberia, the steppes of eastern Siberia and the Far East, and in the Nonchernozem region of European Russia. Source: EBRD Rail Sector Survey Despite an extensive acreage of producing areas, and Waterborne Transport Sector Survey. the CIS has experienced a deficit in domestic grain production and consumption requirement demand will decrease with the decline in military levels over many years. These deficits reflect a orders and other factors. It also provides steel to number of main factors concerning domestic major plants in the Central industrial region - production and output: Moscow, Nizhniy Novgorod and the Volga * Difficult climatic conditions in most grain automobile plant. In the short-term, a decline to growing areas. around 30 million tons a year is expected, after * Extensive cultivation methods. which recovery will depend on the replacement of * Lack of storage, poor storage, and low obsolete steel centers in 1995 to 1997, and on the quality inputs. development of replacement markets for the * Insufficiently trained and unmotivated work military sector (exhibit B-6). force. Most grain is grown in the Russian Federation, The majority of steel mills in the CIS still use Ukraine and Kazakhstan, which account for 90 open hearth technology. Restructuring of the steel percent of total grain production. industry is currently underway aimed primarily at The grain growing area is gradually declining, basing production of raw steel on more effective particularly outside the black earth zone of Russia, processes by improving the efficiency of rolling because of competing infrastructural land use, operations, by manufacturing products with shortage of labor and machinery, declining soil greater value added, by increasing the efficiency fertility from erosion, and operational farm losses. by cutting manpower and by reducing energy Efficiency improvement is recommended in a consumption and pollution. However, problems number of studies, and rapid implementation with financing and hard currency availability, the seems feasible from an agro-technical point of environment, and the procurement of scrap metal view. However, it is believed that institutional and high quality coal may well result in a sharper reform in the agricultural sector will take time and fall in steel production than anticipated. that the CIS will remain a net importer of grain for years to come. This has implications for the Grains. The CIS republics plant more land to provision and utilization of port facilities. grain than any other country in the world but net yields are low and production is less than in either The grain market is broadly segmented into China or the United States. Total production in wheat and coarse grains - barley, corn, maize, 1989 was 193 million tons. No significant changes oats, rye and sorghum (exhibit B-7). Human in production or consumption are expected for the consumption of wheat is approximately 140 kg per next decade unless there is major investment and capita. This is relatively high because of extensive restructuring. Production will remain steady at state subsidies on grain products. The total annual 203 Annex B Losses in agricultural products are reported to Exhibit B.7 Composition of CIS Grin Consumption be high in the CIS. For grains, the losses have been estimated at 30 to 40 million tons, about 20 Coarse percent of the harvest, compared to about 2 Wheat Grains percent in the United States. These losses (percent) (percent) occurred mainly during transport and storage. It is Seeds 11 11 also estimated that the CIS could already approach Industrial demand 1 3 self sufficiency if it were not for losses Food (human consumption) 37 6 experienced in production, transportation, storage, and utilization. Animal feed 41 71 Dockage, waste 10 9 Demand Perspectives. Per capita consumption of cereal products, mainly wheat, is anticipated to Source: OECD, The Soviet Agro-Food System and decrease as prices rise to cover a reduction in Agricultural Trade, 1991 subsidies, and as general welfare improves in the longer term; the estimated income elasticity for cereal is -0.5. This is comparable to the level requirement for wheat can be estimated at 100 calculated for development in the Netherlands million tons, while demand for coarse grains (120 between 1958 and 1980. Total human million tons in 1988/89) is mainly for animal consumption in 2000 is, therefore, anticipated to feed. The feeding efficiency is low, representing be some 90 to 95 percent of 1988 levels. an excess consumption of about 30 percent. CIS Demand for livestock feed grain will rise. Total wheat production stabilized in the 1980s at feed consumption in million tons oats units is approximately 80 to 90 million tons a year. The expected to rise from 445 in 1988 to 490 in 1995 production of coarse grains varied in the same and 540 in 2000. This means that the demand in period between 80 to 100 million tons a year. 2000 will be about 120 percent of the 1988 demand (exhibit B-8). The CIS grain demand is based on food needs as well as the inability of domestic producers to satisfy nutritional requirements of increasing livestock numbers. This growing feed gap is an explanatory factor for the upsurge in grain Exhibit B.8 Projected Grain Demand in Year imports. The present CIS grain import 2000 (niillion tons) requirement for seed, industrial and food demand Coarse is estimated at 45 million tons, of which about 20 Wheat Grains Total million tons are of wheat and 25 million tons coarse grain. Seed 11 13 24 Industrial use 1 4 5 Of the total CIS grain production, the Russian Federation accounts for 55 percent, Ukraine 24 Food 34 7 41 percent and Kazakhstan 13 percent. While Feed 50 104 154 Kazakhstan and Ukraine are reported to be self Waste 10 11 21 sufficient - Ukraine even exports grain to Russia - the Russian Federation represents some 70 to 80 Total 106 139 245 percent of all import demands. Average yields per hectare in Ukraine can be compared with European standards. They are approximately twice Source: EBRD Rail Sector Survey and the production yields attained in Russia and three Waterborne Transport Sector Survey. times the productivity level in Kazakhstan. 204 Anner B Supply Perspectives. A number of negative economies succeed in reducing excess livestock factors are relevant in consideration of potential production.' supply levels for the future: (a) many financially non-viable farms; (b) restructuring of production Ports. The main ports for grain entry have been units; (c) declining soil fertility, especially in the Baltic Sea Ports (handling between 40 to 50 Ukraine; (d) inefficient transportation and percent of imports during the mid to late-1980s) distribution; and (e) decreasing acreage for grain and the Black Sea Ports (handling also between 45 production. to 50 percent of imports over the same period). Conversely, a number of positive factors could Clearly, a shift from grain importing to exporting substantially reduce the losses: (a) efficiency gains could, over time, result in a shift to the Black Sea in harvesting and transport; (b) high potential Ports since they are closer to the grain production increase shifting from wheat area to coarse grains; areas. The distribution of grain cargo throughputs and (c) higher potential yields/productivity from (wheat and flour and coarse grains) in the various agro-industrial restructuring. regional port basins in 1990 is presented in exhibit Only very modest or no increase in total feed B-9. production is expected. Indeed, during the restructuring period over the first half of the Inland Water Transport. The volume of grains 1990s, stagnation or further decrease is foreseen. moved by inland water transport, including grain Production levels fell sharply in 1991 in Russia products and mixed feeds, has fluctuated between and Ukraine. From 1995 onwards, after 6.7 and 7.4 million tons during 1980 to 1990. accounting for significant crop storage and These cargo flows appear to be quite stable. The distribution losses, it is anticipated that production volume of grains handled within the cabotage and actual marketplace supply will recover and trades has varied more significantly, from 0.58 then pick up slowly. Assuming no shift from million tons in 1980 to 1.61 million and 0.72 wheat to coarse grains within the growing areas, million tons in 1985 and 1990, respectively. The the total supply in 2000 is estimated to be in the overall share of inland water transport and order of some 210 to 220 million tons, 100 to 110 percent of late 1980s levels. Variations within these figures may still be caused by climatic circumstances and in specific local and/or regional circumstances. Exhibit B.9 Grain Imports to the CIS, 1990 Overall agricultural production will likely recover from its downturn in the last years of this Basin million tons century, and will show accelerating production improvements in the first decade of the 21st Northern 0.5 century. The best estimate at present is that the Baltic 14.4 CIS as a whole will not become a net grain exporter before 2005. The regional picture may Black Sea/Danube 15.6 differ, for example, in Ukraine and Kazakhstan, where surpluses may occur in overall crop Far East 3.4 production and supply (Ukraine) or in production Total grain throughput 39.5a and supply of specific types of grains (spring wheat from Kazakhstan), which could be traded with surrounding deficit areas. a. includes some double handling of imports The grain import demand in 2000 can therefore in cabotage trades be estimated at 25 to 35 million tons, mainly consisting of coarse grain for animal feed. The Source: EBRD Rail Sector Survey and Waierborne World Bank, however, predicts a more rapid Transport Sector Survey. reduction of the grain imports if the CIS 205 Annex B cabotage in the distribution of grain and milled tons in 1980. Annual cement production in products was approximately 2.3 percent (based on Ukraine is about 22 million tons and in total tonnages) in 1988/89. Kazakhstan is some 8 million tons. Future demand for these commodities will be Minerals and Building Materials. These include primarily influenced by the level of capital cement, bricks and stone, sand and gravel. These investment activity in the commercial, industrial commodities (particularly sand and gravel) and domestic construction industries, including represent very large tonnage on rail, water and roadbuilding. Some further decline in demand is truck. Activity will primarily be affected by the anticipated for the coming three to five years, but level of fixed capital investment in the residential, then will grow as the economy recovers. During commercial and industrial construction industries. the economic recovery period the elasticity of Demand is likely to grow substantially as the demand for building product transport will remain economy recovers. These commodities represent stable, later falling by as much as 15 percent. The a major proportion of inland water transport flows experience of the Netherlands, where sand, and the activities of the river shipping companies gravel, clay and slags represent a rather stable 50 have been dominated by extraction of sand, gravel to 60 percent of waterway traffic, is for traffic to and aggregate from river beds and adjacent follow GDP developments closely, but slowly. quarries, together with the transport and supply of The CIS can expect overall long-term growth in these materials over their local regions. commodity and transport demand. However, the Demand for sand, gravel and aggregate is role of inland waterways for transport may be concentrated on the construction industries and influenced by environmental considerations, to the roadbuilding. The relative scarcity of available extent that riverbed dredging may be restricted or material, particularly for high impact resistance very strictly controlled. The process of aggregate for concrete, ballast and road surfacing, privatization may see river companies separating has meant that transport distances are often activities such as extraction of sand and gravel relatively long. For example, sand and aggregate from transport and river port functions. A is required for construction works to support oil readjustment may then occur in terms of pricing and gas exploration, production and and distribution according to supply contracts. accommodation in Siberia, with the main supply Whether this will lead to a relative increase of sites of suitable material over 1400 km to the efficiency and a reduction in overall movement north west (by sea and river vessel) and west (by demand is difficult to predict. Experience rail). elsewhere indicates that movement distances may Cement production in Russia reached 85 decline as smaller waterside terminals linked by million tons in 1989, dropping to 77 million tons road access are established to serve more localized in 1991. Production is dispersed across the demands. country to serve local markets and large quantities are also produced as a byproduct of metal Timber. Russia is the world's largest producer processing. Major producers are at Novorossijsk, of wood products. Almost all of the resource is Belgorod, Stariy Oskel, Samono, in the Urals and located in the Far East, East and West Siberia, at Spassk-Dalniy in the Far East. northwest, and Urals regions. Negligible amounts Cement output is concentrated at a number of are produced in Ukraine, Belarus and Kazakhstan. major production sites. Much is based on Production has traditionally been dominated by production from slag, as a byproduct of the steel roundwood and sawn timber, although production industry. The largest limestone based cement of plywood, chemical pulp and paper products is plants are located around Novorossijsk and the increasing as a proportion of the total. The largest port has been used for exports of up to 1.4 million production is from the north west. East Siberia tons, but exported just 0.4 million tons in 1990. has the largest timber resources and its production Very little cement is moved by inland waterway: has increased significantly in the last decade. 1.3 million tons in 1990 and a peak of 2.2 million Production declined sharply in 1991 but should 206 Annex B recover in line with the construction sector and overall GNP. The timber sector should do Exhibit B. 10 Forest Products Trade, 1988 relatively well because of anticipated domestic and foreign demand. Baltic/White Seas million tons Traditionally, the main flows have been from Saw/veneer logs 0.81 north to south in the western part of Russia, to the northern ports for export, and from eastern Pulpwood 3.95 Siberia to the Pacific ports. Rail task should grow Sawn wood 2.54 slowly as hauls lengthen. Timber is also a significant inland water transport flow. It Wood chips 0.04 represents one of the main export cargoes carried Wood pulp 0.22 by river-sea vessels from inland river ports and is a major export item in the Baltic ports and the Far Paper/paperboard 0.05 East. Total 7.52 The CIS remains a major producer and exporter Pacific of timber and forest products. Some 15 million Saw/veneer logs 4.98 tons of roundwood and sawn wood was exported Pulpwood in the peak year of 1988, together with 1.1 1.38 million tons of paper and cardboard. Other Sawn wood 0.34 exported forest products include woodchips, plywood and paper pulp. Exports of most Wood chips 0.31 products, particularly paper and cardboard Wood pulp 0.10 products, have declined in recent years, from the 1988 peak to 0.85 million tons in 1990 (exhibit B- Total 7.11.. .............. 10). Black Sea Most forestry resources are located in the Far Pulp wood 0.34 East and in Siberia. The northwest and Urals also Sawn wood 0.85 have significant forestry areas and the northwest has also been the center for production of Wood pulp 0.26 plywood, pulp and paper products. Ukraine and Newsprint 0.17 Kazakhstan have negligible production levels and rely on Russian production and limited imports. Paper/paperboard Total 1.95 Production levels declined in 1990 and again, sharply, in 1991. However, the outlook for the sector is for recovery and relative growth for Source: Fearn-y, Demandfor Forest Prodci Carners, 1991 domestic and export markets. GDP based elasticities for timber and wood products for comparable per capita income levels are in the It should be noted that timber traffic does not order of 0.68 and for printing paper and newsprint always fully appear within port statistics. Much of between 0.7 and 0.9*2 However, supply the timber volume floated in rafts rather than was availability may be restricted in the medium term carried on vessels. The Ministry of Forestry also because and overcutting in the northwest and the controls its own river and seaport terminals which Far East are expected to result in production are separate from the areas controlled by the river limitations and to force a change in output and and seaport authorities. The most notable of these products, with more processing and value added terminals is in St. Petersburg and handles both to timber and paper goods. domestic and international timber traffic. 207 Annex B Inland water transport volumes are expected to 403.4 million tons of cargo passing through CIS fall further in line with the decline in the domestic ports in 1990, only 38 million tons was moved by construction and paper industries to the mid-1990s container or RoRo vessel. Of this, 8 million tons and may not recover beyond the 50.7 million tons was by container and 30 million tons by RoRo moved in 1990, even by the end of the planning ferry. The majority of the RoRo trades are horizon. concentrated on the cabotage routes in the Far Timber as a construction material also enters the East to Sakhalin Island (11.7 million tons). cabotage trades in the Far East, particularly Other RoRo ferry trades are concentrated at Sakhalin and Kamchatka, but levels have declined Ilichevsk (the rail ferry service to Bulgaria, with steadily from 1.5 million tons in 1980 to 1.0 some 5.2 million tons in 1990); and on the million tons in 1990. However, cargo Caspian Sea, where rail RoRo ferry services to requirements appear quite steady and future levels and from Baku and Krasnovodsk,combined are anticipated at around 1.0 million tons handled 5.3 million tons in 1990. The Bulgarian annually. rail ferry service continues today, but Baku services have been interrupted or halted. Some Fertilizers. Major apatite (phosphate) deposits RoRo traffic moves to and from the Baltic region are located on the Kola peninsula: 5.5 million tons (trailers and block stowed cargoes, not rail a year are shipped to plants in European Russia wagons) through St. Petersburg, but very little and 2 million tons a year are exported through deep sea trade is moved by RoRo mode. Murmansk. There is a large superplant at Voskresensk which also produces ground rock, as Also in the Far East Seabee or LASH type do Shchigry and Kingisepp. Domestic demand will barge carrying operations are conducted, including reduce and production levels will thus depend on a nuclear powered barge carrier vessel. These export demand. New reserves are being explored services do not provide full unitization, and the in Khabarovsk, Kusva in Ekaterinburg, Zima in benefit of the operation is primarily to provide Irkutsk and Ulan Ude. Major super plants in access to remote areas without full port facilities. Ukraine are located at Konstantinovka, Gorlovka, Sumy and Vinnitsa. Besides the Kola peninsula, Of the ports handling containers, only Ilichevsk another source is Karatsu in Kazakhstan. and Vostochniy have cargo volumes exceeding The FSU was the world's largest producer of one million tons annually. Vostochniy is nitrogenous fertilizers, with the main production significant because of the connection with the at Novgorod, Shchekino, Novomoskovsk, Trans Siberian Landbridge. St. Petersburg is also Cherepovets, Togliatti, Nevinnomysk and a major container handling port moving 0.9 Berezniki. A new fertilizer plant at Rossosh, million tons of containerized cargo in 1990. In all Chernozem supplies fertilizer to Chernozem, cases, the main direction of cargoes is for North Caucasus and the Volga. Recent production imports. The development of further unitization of expansion is tied to commodity exchanges and the cargoes, particularly containers, is dependent on future will depend on continued demand from trade levels for general cargo commodity groups Central Europe. as a whole and not for any single commodity. The FSU produced over 30 percent of the world's potash (11 million tons) in 1988, Notes primarily in Solikamsk-Berezniki - now declining because of competition from Belarus - and 1. World Bank Commission for Technical Kalush-Strebnik. Potash is primarily produced for Cooperation with the World Bank. Review of Food export. Policy Options and Agricultural Sector Reforms. Working Draft, 20 March 1992. Containers and Unitized Cargoes. Unitization of cargoes in the CIS is at a relatively low level. Of 2. International Timber Trade Federation. 208 Annex C Derivation of Estimates of Physical Consumption of Energy in the Russian Transport Sector Derivation of Oil Energy Consumption aircraft by type, per hour of flight, and the total by the Rail Sector hours flown in international service since 1991. It is further assumed the hours flown by each type Based on actual monthly and annual energy of aircraft is proportional to the number of that consumption figures for all Russian railways in type of aircraft to the total aircraft in the 1990, excluding the Kaliningrad division of the international fleet. The result yielded an average Baltic railway and the Sakhalin's narrow gauge of 6.2 tons fuel per flight hours; the total fuel railway, oil consumption was derived based on the consumed for the international aviation sector was ratio of transport ton-km to actual consumption estimated to be 1.34 million tons in 1991. for the first five months of 1990 as compared to The fuel consumption of the domestic fleet was transport ton-km (tkm) for the same months in estimated by assuming that the ratio of available 1992. The five month total for 1992 was seat kilometers (ASK) to hours flown by the annualized, and that the 19 percent decline in the international sector would also prevail in the rail freight task registered in the first five months domestic airline sector: of 1992 as compared to the same period in 1990 would be indicative of the year as a whole. ASK (million) 22,558.2(sched) + 2,495.4 (chartered) Derivation of Electric Energy Consumption Total hours 216,915 by the Rail Sector 115,499 ASKAhr Rail's share of actual electricity consumption in Total Domestic = 1,363,000 hours flown by domieatic figures for the entire transport sector for 1990 was aircraft 45.2 percent. It was assumed that rail's share of Seat kilometers a 115,499 ASK/hr transport's 1992 electric energy consumption tremainsport's abt thelmetc becsery coisuption r@ 6.2 tons fuel/hr = 8.5 million tons fuel consumed in 1991 remained about the same, because most of rail's by domestic eircraft electric consumption is associated with passenger service, which had not fallen to the same extent as freight transport demand. Total estimated fuel consumed by the air sector in 1991 = 9.8 million tons Derivation of Oil Energy Consumption by the Air Transport Sector Estimated 1992 fuel consumption, 80 percent of 1991 levels = 7.8 million tons For international flights, the estimate is based on fuel consumption characteristics of Russian 209 Annex C Exhibit C. 1 Estimated Aircraft Fuel Consumption Aeroflot's Total Houre Tons/hr in Annual Fuel International Number Percent of by Type of Fuel Consumption Fleet of Aircraft Fleet Aircraft Consumptionb (million tons) IL-62M 28 27 58,567 9.0 .53 IL-86 19 18 39,045 10.6 .07 TU-154M 23 22 47,721 5.4 .26 TU-154 B 4 4 8,677 6.2 .05 TU-154 C 3 3 6,507 5.4 .04 TU-134A-3 8 8 17,353 2.0 .04 IL-76 19 18 39,045 9.0 .35 Total 1.34 a. Based on total hours flown by Aeroflot International which was 216,915 in 1991, including 180,487 in scheduled service and 36,428 in chartered service. b. EBRD-financed Aviation Sector Study, Aerodevco, Appendixes M-S, volume 2. Source: Aeroflot Annual Report, 1991. Derivation of Fuel Consumption by the Average traffic: 4,500 vehicles per day (vpd) Road Transport Sector Medium trucks: 2,250 vpd (60%) x length of network Fuel consumption by vehicle type: - 87.75 milion veh-kmlday Heavy trucks: 900 vpd (20%) x length of network avg. medium-sized truck (diesel) 0.36 liters/km = 35.1 million veh-km/day (average load factor 0.45) Cars: 1,350 vpd (20%)x length of network avg. medium-sized truck (gasoline) 0.43 liters/km = 52.65 million veh-km/day (average load factor 0.45) heavy truck (diesel) 0.63 liters/km Diesel consumption on federal roads (average load factor 0.6) Consumption of medium truck on assumption 45 percent heavy truck (gasoline) 0.76 liters/km diesel engines': (average load factor 0.6) 87.75 x 0.45 x 0.36 x 365 = 5,190 m liters diesel/yr car (gasoline) 0.095 liters/km Consumption of heavy trucks on assumption 60 percent Intercity buses have been grouped with medium diesel engines2: trucks since they represent a very small 35.1 x 0.6 x 0.63 x 365 percentage of total traffic; separate fuel = 4,840 m liters diesellyr consumption figures for these particular buses are no *vilbe Total diesel consumption, federal roads not available. = 5,190 + 4,840 Federal roads: = 10,032 m liters/yr length of federal road network: 39,000 km 210 Annex C Gasoline consumption on federal roads Consumption of heavy truck on assumption 40 percent gasoline engines: Consumption of medium truck on assumption 45 percent 31.05 x 0.5 x 0.76 x 365 gasoline engines: = 4,305 m liters gasoline/yr 87.75 x 0.45 x 0.43 x 365 = 6,200 m liters gasoline/yr Consumption of cars: 118 x 0.095 x 365 Consumption of heavy truck on assumption 40 percent = 4,090 m liters gasoline/yr gasoline engines: 35.1 x 0.4 x 0.76 x 365 Total gasoline consumption, regional roads: = 3,895 m hters gasoline/yr 20,180 + 4,305 + 4,090 = 28,575 m liters/yr Consumption of cars: 52.65 x 0.095 x 365 Enterprise roads: = 1,825 m lters gasoline/yr length of enterprise road network: 450,000 km Total gasoline consumption, federal roads Average traffic: 50 vpd (Bank estimate) = 6,200 + 3,895 + 1,825 = 11,920 m liters/yr Medium trucks: 45 vpd (90%) x 450,000 = 20.25 million veh-km/day Regional roads: length of regional road network: 414,000 km Cars: 5 vpd ( 5%) x 450,000 = 2.25 million veh-km/day Average traffic: 1,050 vp~d Diesel consumption, enterprise roads Medium trucks: 690 vpd (66%) x 414,000 = 285.7 million veh-kmi/day Consumption of medium truck on assumption 45 percent diesel engines: Heavy trucks: 75 vpd ( 7%) x 414,000 20.25 x 0.45 x 0.36 x 365 = 31.05 million veh-km/day = 1,200 m liters dieselVyr Cars: 285 vpd (27%) x 414,000 Gasoline consumption, enterprise roads = 118 million veh-km/day Consumption of medium truck on assumption 45 percent Diesel consumption on regional roads gasoline engines: 20.25 x 0.45 x 0.43 x 365 Consumption of medium truck on assumption 45 percent = 1,430 m liters gasoline/yr diesel engines: 285.7 x 0.45 x 0.36 x 365 Consumption of cars: = 16,890 m liters diesellyr 2.25 x 0.095 x 365 = 78 m liters gasolineJyr Consumption of heavy trucks on assumption 60 percent diesel engines: Total gasoline consumption,enterprise roads: 31.05 x 0.5 x 0.63 x 365 = 3,570 m liters diesel/yr = 1,430 + 78 = 1,508 m liters/yr Total diesel consumption, regional roads Total consumption of gasoline on inter-urban roads: = 16,890 + 3,570 11,920 + 28,575 + 1,508 = 20,460 m liters/yr = 42,000 m liters/yr OR 35 m tons/yr Gasoline consumption on regional roads Total consumption of diesel on inter-urban roads: Consumption of medium truck on assumption 45 percent = 10,032 + 20,460 + 1,200 gasoline engines: O = 31,692 liters/yr 285.7 x 0.45 x 0.43 x 365 OR 26 m tons/yr = 20,180 in liters gasoline/yr Total direct consumption of natural gas by transport = 1.72 b cu n/yr 211 Anneoc C Derivation of Fuel Consumption by the shown below for vessels typically employed by Urban/Suburban Bus Transport Sector Russian carriers. Diesel-powered fuel consumption General Cargo Ship of 15,200 dwt Buses which run on diesel fuel include the Daily Fuel Consunption Qow-speed diesel IKARUS-280, the IKARUS-260, and the LIAZ- engines): 5256. The total number of these buses servicing urban and suburban routes in Russia is 8,700. The at 15 knots average speed - 25 t bunker and 1.5 t diesel standard consumption of diesel fuel per 100 km for the IKARUS-280 is 42 liters, and 38 liters for at 13 knots average speed - 19 t bunker and 1.5 t diesel the IKARUS-260. The average kilometrage per day per bus is 217 km. Average bus fleet at 8 knots average speed - 8 t bunker and 1.5 t diesel availability is 78 percent. Annual diesel fuel consumption using this information amounts to 0.2 million tons, assuming 365 days per year Multi-Purpose Carrerof 22,400dwt operations. Daily Fuel Consumption (medium-speed diesel Gasoline-powered fuel consumption engines): Buses which run on gasoline include the LIAZ- at 15 knots average speed - 23 t bunker and 2.5 t diesel 677, the PAZ-672, and the PAZ-3205. The total at 10 knots average speed - 10 t bunker and 2.5 t diesel number of these buses servicing urban and suburban routes in Russia is 113,000. The standard consumption of diesel fuel per 100 km Dry Bulk Vessel of 65,000 dwt 54 liters. The average kilometrage per day per bus is 157 km. Average bus fleet availability is 76 Daily Fuel Consumption (low-speed diesel percent. Annual gasoline consumption using this engines): information amounts to 2.0 million tons assuming 365 days per year operations. at 15 knots average speed - 35 t bunker and 2.5 t diesel Derivation of Fuel Consumption by the at 12 knots average speed - 18 t bunker and 2.5 t diesel Waterborne Transport Sector The Russian Federation's merchant fleet presently Tankers of 80, 000 dwt comprises 1,433 vessels of 300 or more grt/gt, with a combined carrying capacity of 13.6 million enDines)e dwt. In addition, 350 to 400 smaller vessels of g less than 300 grt/gt trade in national waters only. at 15 knots average speed - 60 t bunker and 2.0 t diesel The inland waterways fleet includes about 9,000 units with individual carrying capacities between at 12 knots average speed - 35 t bunker and 2.0 t diesel 200 and 1,000 dwt. The majority of ocean-going deep sea and Log Carrier of 2,400 dwt cabotage vessels use 180 centistoke bunker oil for propulsion and diesel oil to drive auxiliary Daily Fuel Consumption (medium-speed diesel equipment on board. The daily rate of bunker engines): consumption per vessel depends on the type of engine (turbines, high, medium, or slow-speed at 11 knots average speed - 26 t bunker and 1.5 t diesel diesels) and the operating speed. The differences in consumption patterns can be substantial, as 212 Annex C RoRo Vessel (Sholtsea Ferry) of 2,500 dwt 6,570 tons of bunker fuel per year, and 600 tons of diesel oil, including 438 tons while sailing and Daity Fuel Consumption (medium-speed diesel 162 tons while using auxiliary equipment during engines): port calls. Consequently, the entire maritime fleet of vessels above 300 grt/gt consumes 9.42 million at 15 knots average speed -35 t bunker and 2.0 t diesel million tons of bunker fuel (1,433 x 6,570) and 860,000 tons of diesel oil (1,433 x 600). As regards inland waterway transport, it is Container Ship of 25,000 dwt or 1,282 TEU assumed that presently only 65 percent of the carying capaci,ty current fleet is actually employed, and that the Daily Fuel Consumption (slow-speed diesel active vessels sail half of the year, while spending engines): 40 percent of the time being loaded, unloaded or waiting for cargo, and 10 percent out of at 18 knots average speed - 45 t bunker and 4.0 t diesel commission for repair and overhauls. It is estimated that of the 5,850 (9,000 x 0.65) at 15 knots average speed - 32 t bunker and 4.0 t diewl employed vessels, 4,390 units are propelled with diesel oil, and 1,460 are propelled with bunker fuel. By implication, the annual diesel oil It is estimated that 75 percent of all vessels that consumption within the inland waterway transport are operated within the Federation's inland sector is 7.2 million tons [(365 x 0.5) x 9] x waterway systems use standard-grade diesel oil for 4,390 plus 400,000 tons [(365 x 0.5) x 1.5] x propulsion, and that the remaining 25 percent can 1,460 to account for the operation of auxiliary operate with bunker fuel. Furthermore, it is equipment on vessels that are propelled with assumed that they are equipped with bunker fuel. The latter category is estimated to medium-speed diesel engines. Their average consume 2.93 million tons [(365 x 0.5) x 11] x operating speed is about five knots. The daily fuel 1.460 of bunker fuel per year. consumption is estimated to be of the order of The smaller sea-going vessels of less than 300 nine tons in the case of diesel oil (7.5 tons for grt/gt, all of which are involved in the cabotage propulsion, and 1.5 tons for auxiliary equipment), trades) are each estimated to consume annually and 11 tons in the case of bunker fuel. about 1,752 tons (365 x 0.6) x 8 of bunker fuel, Considering Russia's merchant fleet of vessels and 233 tons (365 x 0.85) x 0.75 of diesel oil. in excess of 300 grt/gt, 36.2 percent of all Assuming 375 vessels in this category, the annual registered vessels have a carrying capacity of less fuel consumption of this fleet segment is estimated than 10,000 dwt; 44.4 percent of the fleet ranges to be of the order of 657,000 tons of bunker fuel, between 10,000 and 50,000 dwt; 10.8 percent and 87,400 tons of diesel oil. between 50,000 and 100,000 dwt; only 8.6 In sum, the annual fuel consumption of percent of the fleet is composed of tankers and Russia's waterborne transport industry is combination carriers that exceed 100,000 dwt in estimated to amount to about 13 million tons their individual carrying capacity. With this fleet (9.42 + 0.66 + 2.93) of bunker fuel, and 8.55 composition, it is assumed that the average daily million tons (0.86 + 0.09 + 7.2 + 0.4) of diesel fuel consumption per vessel is 30 tons of bunker oil. The international market price, in February fuel and 2.0 t of diesel oil. 1993, for bunker fuel was US$80.00/ton, and for Furthermore, it is assumed that Russian diesel oil US$165.00/ton. Thus the present annual ocean-going ships are actually sailing 60 percent fuel cost - at international market prices - of of the time during each year, that they are 30 operating Russia's waterborne carriers is estimated percent of the time in ports, and that they are 10 to be: percent of the time out of commission because of repairs, overhauls. Such scenario implies that each * in ocean transport: US$806 million for ship in the fleet consumes (365 x 0.6) x 30 = bunker fuel, and US$156 million for diesel oil; 213 Annex C 0 in inland waterways transport: US$234 of bunker fuel and 200,000 tons of diesel oil are million for bunker fuel, and US$1,254 million for made available in this context at about half of the diesel oil. current prices in the world market. This would The total estimated annual fuel bill for the imply subsidies on the order of US$80 million, operation of Russia's water transport carriers is equivalent. therefore currently on the order of US$2.45 billion. Notes According to information provided on April 19, 1993 by Vladimir Bortsov, the Maritime Attache 1. Medium trucks: 45 percent diesel, 45 percent at the Russian Embassy in Washington, all fuel gasoline, 10 percent gas. subsidies to national water transport operators have been discontinued except for the cabotage 2. Heavy truck 60 percent diesel, 40 percent sector. It is estimated that about 1.5 million tons gasoline 214 Annex D Compilation of Privatization Acts in the Transport Sector of the Russian Federation MINISTRY OF TRANSPORT OF THE RUSSIAN FEDERATION Moscow 1992 COMPILATION OF PRIVATIZATION ACTS IN THE TRANSPORT SECTOR OF THE RUSSIAN FEDERATION TIhis publication contains normative acts on privatization of enterprises of the transport and roads complex of the Russian Federation, which were prepared by the Ministry of Transport of the Russian Federation and approved by the State Committee on Management of State Property of the Russian Federation in the third quarter of 1992. This publication is intended for senior personnel and experts of management bodies and enterprise managers of all types of transport and roads complex, staff of the Soviets of peoples deputies and regional executive branch structures, peoples deputies of Russia, professors of higher and secondary educational institutions, engaged in training specialists in the field of transport and roads complex, engineering and technical personnel of enterprises and organizations of the transport and roads complex. 215 Annex D STATE COMMITTEE OF THE RUSSLkN FEDERATION ON MANAGEMENT OF STATE PROPERTY O R D E R N 444 - r 16 September 1992 On the specific features of aviation, maritime, river, automobile transport and roads complex enterprises transformation into joint-stock enterprises and their privatization In accordance with the State Program of Privatization of State and Municipal Enterprises in the Russian Federation for 1992, the Decree of the President of the Russian Federation of 1 July 1992 No. 721 'On Organizational Measures for Transformation of State Enterprises, Voluntary Associations of State Enterprises into Joint-Stock Companies", with the purpose of guaranteeing safe and stable functioning of aviation, maritime, river automobile transport and roads complex, establishing conditions for acceleration of privatization of enterprises of these types of transport, account taken of their industry specifics, it is hereby ordered: I. Privatization plans, property value estimates and charters of joint-stock companies, established on the basis of enterprises (or their units) of aviation, maritime and river transport, as well as enterprises (or their units) of automobile general use transportand roads complex, which contain units subject to mobilization, or enterprises which have a dominatingposition on the federal or local markets of goods, activitiesand services, are presented by commissions on privatizationof these enterprises for approval directly to the State Committee of the Russian Federation on Management of State Property and in a copy - to the Ministry of Transport of the Russian Federation. The Ministry of Transport of the Russian Federation examines these documents within a 7 day period, prepares and submits a motivated opinion (conclusions) on them to the State Committee of the Russian Federation on Management of State Property. 2. In case of transformation of enterprises (or their units) of aviation, maritime, river automobile transport and roads complex, specified in Annexes I - 5 to this Order, into unlimited responsibility joint-stock companies, typical additional conditions, reflecting transport and roads complex specifics and the procedures for government executive bodies participation in joint-stock companies management, adopted jointly by the Ministry of transport of Russia and State Committee of the Russian Federation on Management of State Property, are included on a mandatory basis into the Charters of such companies. If necessary, on the request of the Ministry of Transport of Russia the State Committee of the Russian Federation on Management of State Property places controlling block of shares of the mentioned joint-stock companies in state property. 3. Privatization of enterprises, specified in Annexes I - 5 to this Order, is carried out only through the sale of these enterprises at a contest (in accordance with the State Program of Privatization of State and Municipal Enterprises in the Russian Federation for 1992) either by blocks of shares of joint-stock companies, established on their basis, containing no less than 5 percent of their authorized capital. Contest terms and conditions include buyer's obligations to provide transportation services for the state purposes in the interests of the Russian passengers, shippers and consignees within the limit of 60 percent of the total volume of freight, as well as to carry out mobilization tasks. In case of privatization of aircraft repair facilities and ship repair yards 25.5 percent of their shares are placed by the State Committee of the Russian Federation on Management of State Property into authorized capitals of the aviation and maritime companies, serviced by these enterprises, proportionately to the quantity (tonnage, power) of air, marine and river craft, repaired at the mentioned facilities. 4. Taking into account strategic interests of the Russian Federation auctioning of aviation, maritime and river ports, roads complex facilities are carried out subject to special conditions. When these enterprises are put for auction ports are excluded as independent enterprises. 216 Annex D Transformation of the mentioned enterprises into joint-stock companies without exclusion of the ports is allowed upon request of the Ministry of Transport of Russia. The State Committee of the Russian Federation on Management of State Property and the Ministry of Transport of Russia within a two week period develop terms of privatization of these sites, including principles of enterprises division. 5. In a period of time when controlling blocks of shares of joint-stock enterprises, established on the basis of transport and roads complex enterprises, are placed in state property, appointment by the State Committee on Management of State Property of it's representatives on the Boards of Directors of the mentioned joint-stock companies takes place upon request of the Ministry of Transport of Russia. 6. Enterprisesand units ofpublicaviation, maritime, river, automobiletransportand of roadscomplex, listed in Annex 6 to this Order, are not subject to privatization, including transformation into unlimited responsibility joint-stock enterprises (are not included in the authorized fund and excluded from the enterprises property list). 7. Auctioning and privatization of transport enterprises and units, 25 percent or more of the activity of which is foreign economic activity and of enterprises, which dominate the relevant transportation services market, is carried out subject to terms and conditions, developed and adopted by the State Committee of the Russian Federation on Management of State Property with the participation of the Ministry of Transport of Russia and the State Committee of the Russian Federation on Anti-Monopoly Policy and Support of New Economic Structures before 15 October 1992. 8. While putting organizational and legal form of concerns, corporations and other associations of aviation transport enterprises in accordance with existing legislation by way of their transformation into unlimited responsibility joint-stock companies, aircraft of the first and second classes, on the balance of these associations as of I July 1992 and being used by enterprises on a cooperativebasis, are included in the authorized capital of joint-stockcompanies, being established, as depositsof enterprises- founders, which are directly engaged in transportation. CHAIRMAN A.B.CHUBAIS 217 Annex D Annex I to the Order of the State Committee of the Russian Federation on Management of State Property of 16 October 1992 No. 444-r R E G I S T E R OF AVIATION TRANSPORT, SUBJECT TO TRANSFORMATION INTO UNLIMITED RESPONSIBILITY JOINT-STOCK ENTERPRISES, CHARTERS OF WHICH MUST ON A MANDATORY BASIS INCLUDE TYPICAL SUPPLEMENTARY PROVISIONS, ADOPTED JOINTLY BY THE STATE COMMITTEE OF THE RUSSIAN FEDERATION ON MANAGEMENT OF STATE PROPERTY AND THE MINISTRY OF TRANSPORT OF RUSSIA I. Civil aviation producing associations. 2. Aviation companies, air-technical complexes. 3. Central international air service agency. 4. International commercial agency. 5. Central international agency. 6. Center of international settlement of accounts. 7. Aviation enterprises. 8. United aviation units. 9. Testing enterprises. 10. Aviation technical enterprises (complexes). 11. Technical maintenance and repair centers. 12. Air service agencies. 13. Aviation material and technical supplies enterprises. 14. Training centers. 15. Civil aviation aircraft repair and pilot plants. 16. Construction and assembly organizations of the Industrial Construction and Assembly Association 'Aviastroy'. 17. Scientific research, development and information enterprises and organizations, other than listed in Annex 6. 218 Annex D to the Order of the State Committee of the Russian Federation on Management of State Property of 16 October 1992 No. 444-r REGISTER OF MARINE TRANSPORT, SUBJECT TO TRANSFORMATION INTO UNLIMITED RESPONSIBILITY JOINT-STOCK ENTERPRISES, CHARTERS OF WHICH MUST ON A MANDATORY BASIS INCLUDE TYPICAL SUPPLEMENTARY PROVISIONS, ADOPTED JOINTLY BY THE STATE COMMITTEE OF THE RUSSIAN FEDERATION ON MANAGEMENT OF STATE PROPERTY AND THE MINISTRY OF TRANSPORT OF RUSSIA ENTERPRISE BALANCE CAPITAL AVERAGE SHIPPING COMPANIES ASSETS VALUE NUMBER OF (millions of rubles) PERSONNEL Northern 852.9 9,582 Murmansk 2,104.5 8,659 Baltic 1,847.5 14,643 Novorossiysk 1,825.7 9,702 Far Eastern 2,624.7 18,360 Primorsk 576.3 4,550 Kamchatka 370.0 4,244 Arctic 113.3 1,437 Sakhalin 629.1 6,054 SHIP REPAIR YARDS Ship repair yard "Red Farriery" 75.8 2,474 Murmansk 71.1 1,822 Novorossiysk 165.1 2,878 Tuapsinskiy named after Dzerzhinskiy 55.2 1,724 Vladivostok 30.5 1,310 Nakhodka 125.6 4,092 Slavyanskiy 223.2 2,981 Ship repair yard in the city of Sovetskaya Gavan 101.4 2,730 219 Annex D ENTERPRISE BALANCE CAPITAL AVERAGE SHIPPING COMPANIES ASSETS VALUE NUMBER OF (millions of rubles) PERSONNEL Layskiy 6.9 227 Rostov shipyard 'Red Sailor' 4.4 278 OTHER ENTERPRISES Scientific research, development and information enterprises and organizations, listed in Annex 6. 84.0 3,233 Enterprises and organizations "Torgiortrans" 67.4 6,329 Specialized construction and construction assembly organizations on port, hydrotechnical, and underwater technical activity 131.4 3,694 220 Annex D Annex 3 to the Order of the State Committee of the Russian Federation on Management of State Property of 16 October 1992 No. 444-r REGISTER OF RIVER TRANSPORT, SUBJECT TO TRANSFORMATION INTO UNLIMITED RESPONSIBILITY JOINT-STOCK ENTERPRISES, CHARTERS OF WHICH MUST ON A MANDATORY BASIS INCLUDE TYPICAL SUPPLEMENTARY PROVISIONS, ADOPTED JOINTLY BY THE STATE COMMITTEE OF THE RUSSIAN FEDERATION ON MANAGEMENT OF STATE PROPERTY AND THE MINISTRY OF TRANSPORT OF RUSSIA ENTERPRISE BALANCE CAPITAL AVERAGE ASSETS VALUE NUMBER OF (millions of rubles) PERSONNEL 'Volgotanker" Shipping company 975.1 14,161 Shipbuilding and repair plant named after the III International 40.6 1,452 Shipbuilding and repair plant named after 30 anniversary of October 23.75 980 Shipbuilding and repair plant named after Lenin 39.87 1,157 N/fleet repair and maintenance base named after Kuybyshev 24.47 442 Volga united river shipping company 2,645.10 42,710 Gorodetz ship repair and mechanic plant 41.21 1,619 Shipbuilding and ship repair plant named after the 40 anniversary of October 36.21 1,311 Toliatti ship repair and mechanic plant 24.46 1,087 Balakovskiy ship repair plant 35.28 674 Shipbuilding and ship repair plant named after Butyakov 31.81 1,030 Borskaya repair and maintenance fleet base 41.85 587 221 Annex D ENTERPRISE BALANCE CAPITAL AVERAGE ASSETS VALUE NUMBER OF (millions of rubles) PERSONNEL Samarskaya repair and maintenance fleet base 15.7 557 Kriushinskaya repair and maintenance fleet base 53.43 739 Krasnoarmeyskiy ship repair plant 14.86 503 Volzhskaya repair and maintenance fleet base 18.0 532 Ship repair mechanic plant named after Uritskiy 19.5 740 Moscow river shipping company 714.9 14,502 Khlebnikovskiy machinery and ship repair plant 22.192 638 Belgorod shipbuilding and ship repair plant 13.0 780 Moscow shipbuilding and ship repair plant 36.0 1,405 Kama river shipping company 726.5 12,988 Chistopolskiy ship repair plant 23.4 904 Repair and maintenance fleet base in the memory of Dzerzhinskiy 29.9 944 Vyatka river shipping company 84.87 2,062 Repair and maintenance fleet base named after Stepan Khalturin 4.9 141 Belsk river shipping company 153.9 3,413 Volga - Don river shipping company 330.7 3,209 Aksayskaya repair and maintenance fleet base 7.1 214 Kalachevskiy shipbuilding and ship repair plant 25.74 950 Northern river shipping company 397.9 9,161 Limendskiy shipbuilding and ship repair plant 35,586 835 Veliko-Ustugskiy shipbuilding and ship repair plant 20,671 896 222 Annex D ENTERPRISE BALANCE CAPITAL AVERAGE ASSETS VALUE NUMBER OF (millions of rubles) PERSONNEL Sukhonskoye river shipping company 105.6 2,754 North-Western river shipping company 1,269.9 16,730 Nevskiy shipbuilding and ship repair plant 39,826 2,500 Cherepovetskiy shipbuilding and ship repair plant 25,502 1,030 Leningradskaya repair and maintenance fleet base 20,252 560 Belomorsko-Onezhskoye shipping company 682.5 7,665 Petrozavodskaya repair and maintenance fleet base 19,319 722 Medvezhyegorskaya repair and maintenance fleet base 37,628 2,400 Pechora river shipping company 115.0 2,058 Pechora repair and maintenance fleet base 17.5 770 Western river shipping company 79.9 2,098 Ob-hrtysh river shipping company 1,014.1 11,563 Tyumen shipbuilding and ship repair company 35,007 1,045 Tobolskaya repair and maintenance fleet base 38,317 843 Irtysh river shipping company 494.5 9,221 Omskiy shipbuilding and ship repair plant named after 60 anniversary of October 44,446 1,514 Irtyshskaya repair and maintenance N/fleet base 23,473 978 Western Siberia river shipping company 611.1 11,731 223 Annex D ENTERPRISE BALANCE CAPITAL AVERAGE ASSETS VALUE NUMBER OF (millions of rubles) PERSONNEL Samusskiy shipbuilding and ship repair plant 42.2 1,121 Yenisey river shipping company 697.5 11,409 Krasnoyarskiy ship repair plant 50.28 1,083 Krasnoyarskaya Shipyard 12.72 585 Podtesovskaya repair and maintenance fleet base 44.82 1,117 Lena united river shipping company 1,706.4 21,040 Kirenskaya repair and maintenance fleet base 156.6 1,974 Osetrovskaya repair and maintenance fleet base 146.2 1,307 Osetrovskaya shipyard 10.18 492 Alekseevskaya repair and maintenance fleet base 101.39 2,062 Paleduyskaya repair and maintenance fleet base 210.33 2,011 Zhatayskaya repair and maintenance fleet base 347.9 2,859 Eastern Siberia river shipping company 1,823 2,902 Irkutskaya repair and maintenance fleet base 22.39 527 Amur river shipping company 581.02 8,565 Khabarovskaya repair and maintenance fleet base 20.5 836 Kubanskoye river shipping company 73.9 1,627 "Teplokhod" plant 91,292 3,434 Saratov ship repair plant Shipbuilding and ship repair plant named after Ulyanov - Lenin Kashirskiy shipbuilding and ship repair plant Zhigalovskiy shipbuilding plant 224 Annex D Expedition of special sea routes Trade and worker supplies enterprises and units River transport supply enterprises and units within "Snabrechflot" 225 Annex D Annex 4 to the Order of the State Committee of the Russian Federation on Management of State Property of 16 October 1992 No. 444-r REGISTER OF AUTOMOBILE TRANSPORT, SUBJECT TO TRANSFORMATION INTO UNLIMITED RESPONSIBILITY JOINT-STOCK ENTERPRISES, CHARTERS OF WHICH MUST ON A MANDATORY BASIS INCLUDE TYPICAL SUPPLEMENTARY PROVISIONS, ADOPTED JOINTLY BY THE STATE COMMITTEE OF THE RUSSIAN FEDERATION ON MANAGEMENT OF STATE PROPERTY AND THE MINISTRY OF TRANSPORT OF RUSSIA Numbered automobile pools - automobile transport enterprises, having permanent mobilization tasks. Automobile transport enterprises, which service municipal and suburban bus routes, except those listed in Annex 6. Producing associations of automobile stations and passenger automobile stations in national-state, national and administrative- territorial entities of the Russian Federation Material and technical supply and sale enterprises, comprising the 'Autoresurs' association: - Moscow territorial material and technical supply and marketing agency, - Nizhny Novgorod territorial material and technical supply and marketing agency, - Western Siberia territorial material and technical supply and marketing agency, - Northern Caucasus territorial material and technical supply and marketing agency. Scientific and scientific services organizations, design bureaus and information supply enterprises: - State institute for designing automobile repair and automobile transport enterprises and buildings (Giproavtotrans), - Center of scientific organization of labor and production management at automobile transport (Tzentroorgtrudavtotrans), - Central design technological bureau on introduction of new equipment and scientific research at automobile transport (Tzentroavtoteks), - State enterprise "Informavtotrans". - Nizhegorodskoyecomplex transport service enterprise of the peoples enterprise 'Nizhegorodavtotransobsluzhivaniye'. 226 Annex D Annex 5 to the Order of the State Committee of the Russian Federation on Management of State Property of 16 October 1992 No. 444-r REGISTER OF ROADS COMPLEX ENTERPRISES, SUBJECT TO TRANSFORMATION INTO UNLIMITED RESPONSIBILITY JOINT-STOCK COMPANIES, CHARTERS OF WHICH MUST ON A MANDATORY BASIS INCLUDE TYPICAL SUPPLEMENTARY PROVISIONS, ADOPTED JOINTLY BY THE STATE COMMITTEE OF THE RUSSIAN FEDERATION ON MANAGEMENT OF STATE PROPERTY AND THE MINISTRY OF TRANSPORT OF RUSSIA Design and industrial association for production of highly durable stone materials "Granite' Automobile road construction trust No. 1 Automobile road construction trust No.2 Automobile road construction trust No.3 Automobile road construction trust No.4 Trust 'Sibdorstroy" Trust "Dorpromstroy" Enterprises, comprising industrial association for production and repair of road vehicles and equipment "Remdormash" Amur road vehicles and equipment plant Vologda road vehicles and equipment plant Irkutsk road vehicles and equipment plant Krasnodar pilot experimental plant Volgodon pilot experimental plant Kamyshlovskiy road vehicles and equipment plant Vyshnevolotskiy pilot experimental plant Verkhneufaleyskiy pilot experimental plant "Rosdorindustria" enterprise, including: Nalchinskoye iK a p E, e p agency Yeletskiy pilot experimental plant of bridge and reinforced concrete assembly units Asbestovskoye Noryon Maor Adenno 4k, A lo.re'r -. 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Okhotska __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___ D.PR. OF KOREA JUNE 1993 The World Bank Headquarters European Office Tokyo Office 1818 H Street, N.W. 66, avenue d'lena Kokusai Building H Washington, D.C. 20433, U.S.A. 75116 Paris, France 1-1 Marunouchi 3-chome Chiyoda-ku, Tokyo 100, Japan Telephone: (202) 477-1234 Telephone: (1)40.69.30.00 Facsimile: (202)477-6391 Facsimile: (1)40.69.30.66 Telephone: (3) 3214-5001 Telex: wui 64145 WORLDBANK Telex: 640651 Facsimile: (3) 3214-3657 RCA 248423 WORLDBK Telex: 26838 Cable Address: INTBAFRAD WASH INGTON DC 12625 TRN 100 0-8213.-2625-2 TRANSPORT STRATEGIES RUS 111f11 ~11 11 I 1 1 11 11 I 11111 400000009506 $14. 95 Cover design by Debby Malovany ISBN 0-8213-2625-2