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Along the Vertical Line
By the end of this reform the central office of RZD will be a vertical structure, which will include sales, transportation control, infrastructure and locomotives directorates. The key objectives of the Concept of the management system of the holding company are the following: enhancing the management efficiency and attracting outside investment to the industry.
As world practice shows, the decisive condition for effective management, which will result in the enhancement of investment attractiveness, is free competition in the industry. Only in this case, each business enterprise, in order to stay on the market, is forced to run its business effectively. And this, in turn, forces the owners to hire professional managers, who are able to make effective decisions.
However, the railway has been a monopolist for several decades. It is planned to select those kinds of business activities that are potentially competitive, and detach them into separate business entities. This plan is now being realised. 
This is possible only through a transition from command and control management principles to corporate ones more typical of a holding company, into which RZD is being gradually transformed.

Who Controls the Traffic? 
The new Transportation Control Directorate consists of the three previously existing departments of RZD - transport control department, customs and brokering department and freight and commercial department. 
The first activities of the new directorate coincided with a difficult period of economic recession, and this set new tasks for the new subsidiary. “We have to reduce costs significantly. To achieve this, we should divide powers by type of activity, remove functional barriers in the work of our departments, optimise transportation control in terms of cooperation of different departments and increase accountability for the task accomplished,” said Vyacheslav Lemeshko, Vice President of RZD. 
According to Mr Lemeshko, the creation of the directorate meets the market’s requirements and fully complies with the new technological possibilities of traffic control at major sites on the network and transport corridors.
The structural organisation is as follows: the Central Transportation Control Directorate is now the head department, while each railway has its own regional directorate, which will incorporate regional centres within their structure. The basic level will include the station as well as mechanised divisions for loading and unloading operations and commercial operations. The final formation of the new structure will be completed in 2010.
The main advantages of the new system should be a centralised management, a clear division of roles and responsibilities between the units of the directorate and other departments. The effectiveness and efficiency of work will be enhanced by changing from a four-level management system of train and local work to a three-level system, excluding the branch department level.

Stakes are on the Warehouse
It is assumed that one of the main sources of income for the infrastructure company, into which RZD is gradually being transformed, will be the directorate for management of terminal and warehouse complex (DTWC). The decision to detach all the warehouse operations into a separate structure was reached in late summer.
At first, DTWC will function as a branch of RZD, i.e. on the same principles as other departments of the company currently work. This will allow the company to avoid risks, including those related to the need to detach the units limited in turnover which play a significant role in operating activities, as well as to test the management functions and the procedures of TWC divisions’ cooperation. In the future, the directorate may be transformed into a subsidiary structure of RZD, which will make it more customer-oriented and flexible to attract both investors and loan financing.
Today the volume of the company’s assets in the form of warehouses and areas – utilised to store and handle cargoes, as well as to perform a number of other functions – equals 5.6 million square metres. Given the fact that storage facilities across Russia, according to the experts, amount to 17 million square metres, RZD is potentially the largest participant in the market for storing goods. However, the assets’ quality and the management strategy leave much to be desired. A large of it are outdoor storage or poorly equipped premises, many of which is not in use. 
RZD does not possess class A (the highest category) units. Deterioration of the warehouses’ resources of RZD is rether great. It is worth noting that even a little part of the areas currently in use have brought the company 2.3 billion rubles in 2008. The company handled 110.6 million tons of cargo, most of which were containers (48%) and bulk cargo (37%). It can be assumed that, in future, revenue will multiply. The company representatives claim that by 2015 the share of RZD on the storage services market should grow significantly.
RZD’s warehouse park is perfectly located. It is reasonable to assume that the directorate’s or the subsidiary company’s services will be important for both cargo owners and railway operators. It is obvious that the newly established directorate will act in its own commercial interests and therefore will try to provide services to the widest range of possible customers. Moreover, the independent market participants in the transport market could become investors in certain attractive projects.
The optimal scheme might be BOT (build-operate-transfer), where an investor replaces a tumbledown building with a new one of the desired size and utilises it for a period (say, 10 years) before the warehouse becomes the property of RZD, and the investor turns into a tenant of this property.
In the future, the terminal business of RZD promises to become an independent large-scale logistics project. According to Vladimir Yakunin, President of RZD, it is planned to “create 35-40 modern terminal and logistics centres (TLC) on the railways in the major transportation hubs and industrial clusters” by 2030. For instance, the company considers the opportunities to attract Russian and foreign partners to build logistics centres in Moscow, Samara, Leningrad and Sverdlovsk regions.
“We can identify specific points to create logistics centres across the whole network. The attempts to build such centres in Moscow, which were not integrated into the railway infrastructure, have caused serious problems such as road congestion. Therefore, it seems to me that the intermodal logistics centre, constructed on the basis of RZD, will be significantly more effective than those similar objects that were attached, say, only to the roads,” adds Mr Yakunin.
Experts believe that high quality and a stable service at a reasonable price will make the work of the new directorate profitable. The idea is reasonable but it needs to be skillfully realised, say logistics market experts.

Locomotive divisions will be reorganised
A Directorate for Traction and the Directorate for Traction Rolling Stock Repair will be established on the basis of RZD Locomotive Facilities Department. The decision was taken in July, 2009. This reorganisation is aimed at improving the efficiency of locomotive facilities and optimising the costs and improving the quality of services provided by the company.
The existing system of locomotive control - territorial and functional - includes a four-level management system and contains a number of shortcomings in terms of clear division of functions, powers and responsibilities, as well as financial planning. Simultaneous and parallel control of locomotive repairing and maintenance activities makes the system even more complicated. When the new directorates are established, these two fields will be separated which enables the company to employ a three-level management model.
The principal activities of the Directorate for Traction will be the maintenance of the locomotives and locomotive crews for the planned volume of traffic and goods, as well as ensuring safety. The directorate will be supplied with a locomotive fleet (freight, passenger, shunting), energy laboratories and equipment for training and rehabilitation of locomotive brigades. The structure of the branch will include 15 road directorates for traction, 135 operational locomotive depots, including five compound depots. This will see the full integration of the locomotive directorate into a single technological process of cargo and passenger transportation.
The Directorate for Traction Rolling Stock Repair will carry out maintenance, routine repairs and overhaul of locomotives belonging to the locomotive directorate. The directorate will be given the appropriate property – servicing stations and locomotive depots. The structure of the branch will include 15 road directorate for traction rolling stock repair and 110 depots.
The level of specialisation will be maximized. In addition, the new organisation of work will allow regulation of  the financing of the locomotive facilities. Until now, it was carried out on the general principles of the company: funds were assigned immediately both for repairing and maintenance. The reorganisation will allow funds to be used more efficiently. 
The formation of the structural units of the two directorates will be completed by mid-2010. However the directorates at Oktyabrskaya, Krasnoyarsk and East-Siberian railways have already been created as pilot schemes.
For instance, the directorate for traction at the Oktyabrskaya Railway has been working since August 1. It includes the technical, industrial, financial and economic units, as well as divisions for personnel management and traffic safety. The directorate took over and now manages 14 depots. Its main function is to provide locomotives and crews for the transportation of cargo and passengers.
Separation of the operational and maintenance functions at Krasnoyarsk railway has already improved the quality and quantity figures of each service. There is another positive point as well. The directorate for traction now plans and organises the repair of locomotives. This means that it is possible to choose a contractor (i.e. depot) on the basis of their price and quality of work. Thus the depots, in their turn, will try not to lose their customers.
Now the share of locomotives accounts for up to 20% of total hardware failures. The increase in the level of specialisation will enhance the quality of repair, and this, in turn, will stimulate improvements in the conditions of locomotive operation, reduce the number of technical failures and non-productive losses.

Faster and faster
In 2009 the Directorate for High-Speed transportation, which is also a branch of RZD, was established to organise efficient high-speed transportation using a new generation of high-speed trains.
Development of high-speed transportation in Russia is hampered by a lack of infrastructure. However, even where it is already possible to develop a speed of 250 kph (for instance, on the route section Borovenka - Torbin between Moscow and St Petersburg) only fast trains, passenger trains and freight trains are running.
In other countries there are only a few pieces of railway which are used by all types of rolling stock. Over time, attitudes towards technology in traffic should change in Russia as well. Experts advise separating the high-speed passenger traffic from freight traffic in order to reduce the costs of maintaining the infrastructure.
Different attitudes towards the construction of railways should also appear. Most countries in Europe and Asia (China, in particular) tend to build entirely new tracks, rather than restoring the old ones. While in Germany they can safely close the whole area and carry out an overhaul and reconditioning due to the availability of bypass routes, it is still impossible to do the same in Russia. Do not forget that every intermission on a busy route – which requires careful planning and includes not only the repairing period itself but also the time to take the technical equipment away – is a costly undertaking. If parallel routes are available it could reduce these costs and provide real savings. These make the idea of connecting Moscow to nearby and remote regions through high-speed traffic very promising. The program of fast transportation development will run until 2030. 
Elena ushkova

viewpoint
Yrysbek Tashbaev
Deputy General Director STS/RLS-Logistics
– The decision to combine warehouse operations under a unified structure, which will make a kind of managing company, is correct. Instead of separate assets scattered over the railways and managed locally, a unified set of sales policies, tariffs and standards will be developed. In short, it means management centralisation, which is relevant in the current economic situation. Services have to be offered based on the preferences of the client and taking into account market conditions. Once this has happened the new directorate – as a managing company – will be successful.
First, they need to carry out an audit of all assets and then plan activities bearing in mind the perspectives of each individual unit and its investment needs. This program should be at the heart of the proposals to potential investors. I think RZD will have no difficulties in finding its partners, given the number of attractive competitive factors, such as the location, for example.
 
 
Oleg Ulyanov
Head of High-Speed Service Directorate
– First we need to dispel the myth existing in Russia that railway passenger transport cannot be prestigious and highly profitable. When we succeed, the attitude towards transportation and those people who use it will be completely different.
Next year we plan to put into operation an Allegro train produced by Alstom on the route between St Petersburg and Helsinki. This is still the only high-speed train which is intended to run outside Russia. But in terms of passenger traffic several directions are literally begging to be accelerated. And we need to integrate seamlessly into Europe’s high-speed transportation, opening not just a window but a door, which will be flooded with a steady flow of traffic.
 
Alexey Mironov,
Head of the Central Transportation Control Directorate
– The purpose of the Central Transportation Control Directorate is to consolidate efforts to create favorable conditions for the consignor and the consignee. 
After the «Second cargo company» is established the whole wagon park of RZD will be redistributed between the two cargo companies (First and Second), while the Transportation Control Directorate functions will also include management of the rolling stock.
The legal rules regulating rolling stock operation within Russian railways network should be changed. The new system will help manage the fleet of rolling stock and be competitive in terms of tariffs (the rolling stock owner can apply a rate lower than the one fixed for RZD).
 
 
 
 
Pavel Burtsev,
Deputy Head of the Oktyabrskaya Railway
– At first it is necessary to prepare all services and railway’ divisions to manage their economic activities themselves within the new vertical structure, and then gradually detach them into separate business units. 
This reveals the meaning of the entire reform. What is the true price of independent decision-making? There are no more long-term discussions over each decision, multiple restrictions on funds, limits and quantity. There is freedom instead. 
However any error leads to a decrease in the value of business, which will, in the long term, reduce the share prices of subsidiary companies. 
On the one hand, the management has its hands freed, and on the other, the whole business is at stake. This mechanism makes everyone act rationally and based on the real market conditions: without being pretentious, giving upward distortions and showing senseless heaps of figures in thousands of useless records.
This reflects not only the expectations of the company’s top management, but also the aspirations of ordinary performers. 
During the transition period, the railway departments will still operate which means two parallel systems of management working at the same time ensuring the succession of managing functions.
    [~DETAIL_TEXT] => 
Along the Vertical Line
By the end of this reform the central office of RZD will be a vertical structure, which will include sales, transportation control, infrastructure and locomotives directorates. The key objectives of the Concept of the management system of the holding company are the following: enhancing the management efficiency and attracting outside investment to the industry.
As world practice shows, the decisive condition for effective management, which will result in the enhancement of investment attractiveness, is free competition in the industry. Only in this case, each business enterprise, in order to stay on the market, is forced to run its business effectively. And this, in turn, forces the owners to hire professional managers, who are able to make effective decisions.
However, the railway has been a monopolist for several decades. It is planned to select those kinds of business activities that are potentially competitive, and detach them into separate business entities. This plan is now being realised. 
This is possible only through a transition from command and control management principles to corporate ones more typical of a holding company, into which RZD is being gradually transformed.

Who Controls the Traffic? 
The new Transportation Control Directorate consists of the three previously existing departments of RZD - transport control department, customs and brokering department and freight and commercial department. 
The first activities of the new directorate coincided with a difficult period of economic recession, and this set new tasks for the new subsidiary. “We have to reduce costs significantly. To achieve this, we should divide powers by type of activity, remove functional barriers in the work of our departments, optimise transportation control in terms of cooperation of different departments and increase accountability for the task accomplished,” said Vyacheslav Lemeshko, Vice President of RZD. 
According to Mr Lemeshko, the creation of the directorate meets the market’s requirements and fully complies with the new technological possibilities of traffic control at major sites on the network and transport corridors.
The structural organisation is as follows: the Central Transportation Control Directorate is now the head department, while each railway has its own regional directorate, which will incorporate regional centres within their structure. The basic level will include the station as well as mechanised divisions for loading and unloading operations and commercial operations. The final formation of the new structure will be completed in 2010.
The main advantages of the new system should be a centralised management, a clear division of roles and responsibilities between the units of the directorate and other departments. The effectiveness and efficiency of work will be enhanced by changing from a four-level management system of train and local work to a three-level system, excluding the branch department level.

Stakes are on the Warehouse
It is assumed that one of the main sources of income for the infrastructure company, into which RZD is gradually being transformed, will be the directorate for management of terminal and warehouse complex (DTWC). The decision to detach all the warehouse operations into a separate structure was reached in late summer.
At first, DTWC will function as a branch of RZD, i.e. on the same principles as other departments of the company currently work. This will allow the company to avoid risks, including those related to the need to detach the units limited in turnover which play a significant role in operating activities, as well as to test the management functions and the procedures of TWC divisions’ cooperation. In the future, the directorate may be transformed into a subsidiary structure of RZD, which will make it more customer-oriented and flexible to attract both investors and loan financing.
Today the volume of the company’s assets in the form of warehouses and areas – utilised to store and handle cargoes, as well as to perform a number of other functions – equals 5.6 million square metres. Given the fact that storage facilities across Russia, according to the experts, amount to 17 million square metres, RZD is potentially the largest participant in the market for storing goods. However, the assets’ quality and the management strategy leave much to be desired. A large of it are outdoor storage or poorly equipped premises, many of which is not in use. 
RZD does not possess class A (the highest category) units. Deterioration of the warehouses’ resources of RZD is rether great. It is worth noting that even a little part of the areas currently in use have brought the company 2.3 billion rubles in 2008. The company handled 110.6 million tons of cargo, most of which were containers (48%) and bulk cargo (37%). It can be assumed that, in future, revenue will multiply. The company representatives claim that by 2015 the share of RZD on the storage services market should grow significantly.
RZD’s warehouse park is perfectly located. It is reasonable to assume that the directorate’s or the subsidiary company’s services will be important for both cargo owners and railway operators. It is obvious that the newly established directorate will act in its own commercial interests and therefore will try to provide services to the widest range of possible customers. Moreover, the independent market participants in the transport market could become investors in certain attractive projects.
The optimal scheme might be BOT (build-operate-transfer), where an investor replaces a tumbledown building with a new one of the desired size and utilises it for a period (say, 10 years) before the warehouse becomes the property of RZD, and the investor turns into a tenant of this property.
In the future, the terminal business of RZD promises to become an independent large-scale logistics project. According to Vladimir Yakunin, President of RZD, it is planned to “create 35-40 modern terminal and logistics centres (TLC) on the railways in the major transportation hubs and industrial clusters” by 2030. For instance, the company considers the opportunities to attract Russian and foreign partners to build logistics centres in Moscow, Samara, Leningrad and Sverdlovsk regions.
“We can identify specific points to create logistics centres across the whole network. The attempts to build such centres in Moscow, which were not integrated into the railway infrastructure, have caused serious problems such as road congestion. Therefore, it seems to me that the intermodal logistics centre, constructed on the basis of RZD, will be significantly more effective than those similar objects that were attached, say, only to the roads,” adds Mr Yakunin.
Experts believe that high quality and a stable service at a reasonable price will make the work of the new directorate profitable. The idea is reasonable but it needs to be skillfully realised, say logistics market experts.

Locomotive divisions will be reorganised
A Directorate for Traction and the Directorate for Traction Rolling Stock Repair will be established on the basis of RZD Locomotive Facilities Department. The decision was taken in July, 2009. This reorganisation is aimed at improving the efficiency of locomotive facilities and optimising the costs and improving the quality of services provided by the company.
The existing system of locomotive control - territorial and functional - includes a four-level management system and contains a number of shortcomings in terms of clear division of functions, powers and responsibilities, as well as financial planning. Simultaneous and parallel control of locomotive repairing and maintenance activities makes the system even more complicated. When the new directorates are established, these two fields will be separated which enables the company to employ a three-level management model.
The principal activities of the Directorate for Traction will be the maintenance of the locomotives and locomotive crews for the planned volume of traffic and goods, as well as ensuring safety. The directorate will be supplied with a locomotive fleet (freight, passenger, shunting), energy laboratories and equipment for training and rehabilitation of locomotive brigades. The structure of the branch will include 15 road directorates for traction, 135 operational locomotive depots, including five compound depots. This will see the full integration of the locomotive directorate into a single technological process of cargo and passenger transportation.
The Directorate for Traction Rolling Stock Repair will carry out maintenance, routine repairs and overhaul of locomotives belonging to the locomotive directorate. The directorate will be given the appropriate property – servicing stations and locomotive depots. The structure of the branch will include 15 road directorate for traction rolling stock repair and 110 depots.
The level of specialisation will be maximized. In addition, the new organisation of work will allow regulation of  the financing of the locomotive facilities. Until now, it was carried out on the general principles of the company: funds were assigned immediately both for repairing and maintenance. The reorganisation will allow funds to be used more efficiently. 
The formation of the structural units of the two directorates will be completed by mid-2010. However the directorates at Oktyabrskaya, Krasnoyarsk and East-Siberian railways have already been created as pilot schemes.
For instance, the directorate for traction at the Oktyabrskaya Railway has been working since August 1. It includes the technical, industrial, financial and economic units, as well as divisions for personnel management and traffic safety. The directorate took over and now manages 14 depots. Its main function is to provide locomotives and crews for the transportation of cargo and passengers.
Separation of the operational and maintenance functions at Krasnoyarsk railway has already improved the quality and quantity figures of each service. There is another positive point as well. The directorate for traction now plans and organises the repair of locomotives. This means that it is possible to choose a contractor (i.e. depot) on the basis of their price and quality of work. Thus the depots, in their turn, will try not to lose their customers.
Now the share of locomotives accounts for up to 20% of total hardware failures. The increase in the level of specialisation will enhance the quality of repair, and this, in turn, will stimulate improvements in the conditions of locomotive operation, reduce the number of technical failures and non-productive losses.

Faster and faster
In 2009 the Directorate for High-Speed transportation, which is also a branch of RZD, was established to organise efficient high-speed transportation using a new generation of high-speed trains.
Development of high-speed transportation in Russia is hampered by a lack of infrastructure. However, even where it is already possible to develop a speed of 250 kph (for instance, on the route section Borovenka - Torbin between Moscow and St Petersburg) only fast trains, passenger trains and freight trains are running.
In other countries there are only a few pieces of railway which are used by all types of rolling stock. Over time, attitudes towards technology in traffic should change in Russia as well. Experts advise separating the high-speed passenger traffic from freight traffic in order to reduce the costs of maintaining the infrastructure.
Different attitudes towards the construction of railways should also appear. Most countries in Europe and Asia (China, in particular) tend to build entirely new tracks, rather than restoring the old ones. While in Germany they can safely close the whole area and carry out an overhaul and reconditioning due to the availability of bypass routes, it is still impossible to do the same in Russia. Do not forget that every intermission on a busy route – which requires careful planning and includes not only the repairing period itself but also the time to take the technical equipment away – is a costly undertaking. If parallel routes are available it could reduce these costs and provide real savings. These make the idea of connecting Moscow to nearby and remote regions through high-speed traffic very promising. The program of fast transportation development will run until 2030. 
Elena ushkova

viewpoint
Yrysbek Tashbaev
Deputy General Director STS/RLS-Logistics
– The decision to combine warehouse operations under a unified structure, which will make a kind of managing company, is correct. Instead of separate assets scattered over the railways and managed locally, a unified set of sales policies, tariffs and standards will be developed. In short, it means management centralisation, which is relevant in the current economic situation. Services have to be offered based on the preferences of the client and taking into account market conditions. Once this has happened the new directorate – as a managing company – will be successful.
First, they need to carry out an audit of all assets and then plan activities bearing in mind the perspectives of each individual unit and its investment needs. This program should be at the heart of the proposals to potential investors. I think RZD will have no difficulties in finding its partners, given the number of attractive competitive factors, such as the location, for example.
 
 
Oleg Ulyanov
Head of High-Speed Service Directorate
– First we need to dispel the myth existing in Russia that railway passenger transport cannot be prestigious and highly profitable. When we succeed, the attitude towards transportation and those people who use it will be completely different.
Next year we plan to put into operation an Allegro train produced by Alstom on the route between St Petersburg and Helsinki. This is still the only high-speed train which is intended to run outside Russia. But in terms of passenger traffic several directions are literally begging to be accelerated. And we need to integrate seamlessly into Europe’s high-speed transportation, opening not just a window but a door, which will be flooded with a steady flow of traffic.
 
Alexey Mironov,
Head of the Central Transportation Control Directorate
– The purpose of the Central Transportation Control Directorate is to consolidate efforts to create favorable conditions for the consignor and the consignee. 
After the «Second cargo company» is established the whole wagon park of RZD will be redistributed between the two cargo companies (First and Second), while the Transportation Control Directorate functions will also include management of the rolling stock.
The legal rules regulating rolling stock operation within Russian railways network should be changed. The new system will help manage the fleet of rolling stock and be competitive in terms of tariffs (the rolling stock owner can apply a rate lower than the one fixed for RZD).
 
 
 
 
Pavel Burtsev,
Deputy Head of the Oktyabrskaya Railway
– At first it is necessary to prepare all services and railway’ divisions to manage their economic activities themselves within the new vertical structure, and then gradually detach them into separate business units. 
This reveals the meaning of the entire reform. What is the true price of independent decision-making? There are no more long-term discussions over each decision, multiple restrictions on funds, limits and quantity. There is freedom instead. 
However any error leads to a decrease in the value of business, which will, in the long term, reduce the share prices of subsidiary companies. 
On the one hand, the management has its hands freed, and on the other, the whole business is at stake. This mechanism makes everyone act rationally and based on the real market conditions: without being pretentious, giving upward distortions and showing senseless heaps of figures in thousands of useless records.
This reflects not only the expectations of the company’s top management, but also the aspirations of ordinary performers. 
During the transition period, the railway departments will still operate which means two parallel systems of management working at the same time ensuring the succession of managing functions.
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Along the Vertical Line
By the end of this reform the central office of RZD will be a vertical structure, which will include sales, transportation control, infrastructure and locomotives directorates. The key objectives of the Concept of the management system of the holding company are the following: enhancing the management efficiency and attracting outside investment to the industry.
As world practice shows, the decisive condition for effective management, which will result in the enhancement of investment attractiveness, is free competition in the industry. Only in this case, each business enterprise, in order to stay on the market, is forced to run its business effectively. And this, in turn, forces the owners to hire professional managers, who are able to make effective decisions.
However, the railway has been a monopolist for several decades. It is planned to select those kinds of business activities that are potentially competitive, and detach them into separate business entities. This plan is now being realised. 
This is possible only through a transition from command and control management principles to corporate ones more typical of a holding company, into which RZD is being gradually transformed.

Who Controls the Traffic? 
The new Transportation Control Directorate consists of the three previously existing departments of RZD - transport control department, customs and brokering department and freight and commercial department. 
The first activities of the new directorate coincided with a difficult period of economic recession, and this set new tasks for the new subsidiary. “We have to reduce costs significantly. To achieve this, we should divide powers by type of activity, remove functional barriers in the work of our departments, optimise transportation control in terms of cooperation of different departments and increase accountability for the task accomplished,” said Vyacheslav Lemeshko, Vice President of RZD. 
According to Mr Lemeshko, the creation of the directorate meets the market’s requirements and fully complies with the new technological possibilities of traffic control at major sites on the network and transport corridors.
The structural organisation is as follows: the Central Transportation Control Directorate is now the head department, while each railway has its own regional directorate, which will incorporate regional centres within their structure. The basic level will include the station as well as mechanised divisions for loading and unloading operations and commercial operations. The final formation of the new structure will be completed in 2010.
The main advantages of the new system should be a centralised management, a clear division of roles and responsibilities between the units of the directorate and other departments. The effectiveness and efficiency of work will be enhanced by changing from a four-level management system of train and local work to a three-level system, excluding the branch department level.

Stakes are on the Warehouse
It is assumed that one of the main sources of income for the infrastructure company, into which RZD is gradually being transformed, will be the directorate for management of terminal and warehouse complex (DTWC). The decision to detach all the warehouse operations into a separate structure was reached in late summer.
At first, DTWC will function as a branch of RZD, i.e. on the same principles as other departments of the company currently work. This will allow the company to avoid risks, including those related to the need to detach the units limited in turnover which play a significant role in operating activities, as well as to test the management functions and the procedures of TWC divisions’ cooperation. In the future, the directorate may be transformed into a subsidiary structure of RZD, which will make it more customer-oriented and flexible to attract both investors and loan financing.
Today the volume of the company’s assets in the form of warehouses and areas – utilised to store and handle cargoes, as well as to perform a number of other functions – equals 5.6 million square metres. Given the fact that storage facilities across Russia, according to the experts, amount to 17 million square metres, RZD is potentially the largest participant in the market for storing goods. However, the assets’ quality and the management strategy leave much to be desired. A large of it are outdoor storage or poorly equipped premises, many of which is not in use. 
RZD does not possess class A (the highest category) units. Deterioration of the warehouses’ resources of RZD is rether great. It is worth noting that even a little part of the areas currently in use have brought the company 2.3 billion rubles in 2008. The company handled 110.6 million tons of cargo, most of which were containers (48%) and bulk cargo (37%). It can be assumed that, in future, revenue will multiply. The company representatives claim that by 2015 the share of RZD on the storage services market should grow significantly.
RZD’s warehouse park is perfectly located. It is reasonable to assume that the directorate’s or the subsidiary company’s services will be important for both cargo owners and railway operators. It is obvious that the newly established directorate will act in its own commercial interests and therefore will try to provide services to the widest range of possible customers. Moreover, the independent market participants in the transport market could become investors in certain attractive projects.
The optimal scheme might be BOT (build-operate-transfer), where an investor replaces a tumbledown building with a new one of the desired size and utilises it for a period (say, 10 years) before the warehouse becomes the property of RZD, and the investor turns into a tenant of this property.
In the future, the terminal business of RZD promises to become an independent large-scale logistics project. According to Vladimir Yakunin, President of RZD, it is planned to “create 35-40 modern terminal and logistics centres (TLC) on the railways in the major transportation hubs and industrial clusters” by 2030. For instance, the company considers the opportunities to attract Russian and foreign partners to build logistics centres in Moscow, Samara, Leningrad and Sverdlovsk regions.
“We can identify specific points to create logistics centres across the whole network. The attempts to build such centres in Moscow, which were not integrated into the railway infrastructure, have caused serious problems such as road congestion. Therefore, it seems to me that the intermodal logistics centre, constructed on the basis of RZD, will be significantly more effective than those similar objects that were attached, say, only to the roads,” adds Mr Yakunin.
Experts believe that high quality and a stable service at a reasonable price will make the work of the new directorate profitable. The idea is reasonable but it needs to be skillfully realised, say logistics market experts.

Locomotive divisions will be reorganised
A Directorate for Traction and the Directorate for Traction Rolling Stock Repair will be established on the basis of RZD Locomotive Facilities Department. The decision was taken in July, 2009. This reorganisation is aimed at improving the efficiency of locomotive facilities and optimising the costs and improving the quality of services provided by the company.
The existing system of locomotive control - territorial and functional - includes a four-level management system and contains a number of shortcomings in terms of clear division of functions, powers and responsibilities, as well as financial planning. Simultaneous and parallel control of locomotive repairing and maintenance activities makes the system even more complicated. When the new directorates are established, these two fields will be separated which enables the company to employ a three-level management model.
The principal activities of the Directorate for Traction will be the maintenance of the locomotives and locomotive crews for the planned volume of traffic and goods, as well as ensuring safety. The directorate will be supplied with a locomotive fleet (freight, passenger, shunting), energy laboratories and equipment for training and rehabilitation of locomotive brigades. The structure of the branch will include 15 road directorates for traction, 135 operational locomotive depots, including five compound depots. This will see the full integration of the locomotive directorate into a single technological process of cargo and passenger transportation.
The Directorate for Traction Rolling Stock Repair will carry out maintenance, routine repairs and overhaul of locomotives belonging to the locomotive directorate. The directorate will be given the appropriate property – servicing stations and locomotive depots. The structure of the branch will include 15 road directorate for traction rolling stock repair and 110 depots.
The level of specialisation will be maximized. In addition, the new organisation of work will allow regulation of  the financing of the locomotive facilities. Until now, it was carried out on the general principles of the company: funds were assigned immediately both for repairing and maintenance. The reorganisation will allow funds to be used more efficiently. 
The formation of the structural units of the two directorates will be completed by mid-2010. However the directorates at Oktyabrskaya, Krasnoyarsk and East-Siberian railways have already been created as pilot schemes.
For instance, the directorate for traction at the Oktyabrskaya Railway has been working since August 1. It includes the technical, industrial, financial and economic units, as well as divisions for personnel management and traffic safety. The directorate took over and now manages 14 depots. Its main function is to provide locomotives and crews for the transportation of cargo and passengers.
Separation of the operational and maintenance functions at Krasnoyarsk railway has already improved the quality and quantity figures of each service. There is another positive point as well. The directorate for traction now plans and organises the repair of locomotives. This means that it is possible to choose a contractor (i.e. depot) on the basis of their price and quality of work. Thus the depots, in their turn, will try not to lose their customers.
Now the share of locomotives accounts for up to 20% of total hardware failures. The increase in the level of specialisation will enhance the quality of repair, and this, in turn, will stimulate improvements in the conditions of locomotive operation, reduce the number of technical failures and non-productive losses.

Faster and faster
In 2009 the Directorate for High-Speed transportation, which is also a branch of RZD, was established to organise efficient high-speed transportation using a new generation of high-speed trains.
Development of high-speed transportation in Russia is hampered by a lack of infrastructure. However, even where it is already possible to develop a speed of 250 kph (for instance, on the route section Borovenka - Torbin between Moscow and St Petersburg) only fast trains, passenger trains and freight trains are running.
In other countries there are only a few pieces of railway which are used by all types of rolling stock. Over time, attitudes towards technology in traffic should change in Russia as well. Experts advise separating the high-speed passenger traffic from freight traffic in order to reduce the costs of maintaining the infrastructure.
Different attitudes towards the construction of railways should also appear. Most countries in Europe and Asia (China, in particular) tend to build entirely new tracks, rather than restoring the old ones. While in Germany they can safely close the whole area and carry out an overhaul and reconditioning due to the availability of bypass routes, it is still impossible to do the same in Russia. Do not forget that every intermission on a busy route – which requires careful planning and includes not only the repairing period itself but also the time to take the technical equipment away – is a costly undertaking. If parallel routes are available it could reduce these costs and provide real savings. These make the idea of connecting Moscow to nearby and remote regions through high-speed traffic very promising. The program of fast transportation development will run until 2030. 
Elena ushkova

viewpoint
Yrysbek Tashbaev
Deputy General Director STS/RLS-Logistics
– The decision to combine warehouse operations under a unified structure, which will make a kind of managing company, is correct. Instead of separate assets scattered over the railways and managed locally, a unified set of sales policies, tariffs and standards will be developed. In short, it means management centralisation, which is relevant in the current economic situation. Services have to be offered based on the preferences of the client and taking into account market conditions. Once this has happened the new directorate – as a managing company – will be successful.
First, they need to carry out an audit of all assets and then plan activities bearing in mind the perspectives of each individual unit and its investment needs. This program should be at the heart of the proposals to potential investors. I think RZD will have no difficulties in finding its partners, given the number of attractive competitive factors, such as the location, for example.
 
 
Oleg Ulyanov
Head of High-Speed Service Directorate
– First we need to dispel the myth existing in Russia that railway passenger transport cannot be prestigious and highly profitable. When we succeed, the attitude towards transportation and those people who use it will be completely different.
Next year we plan to put into operation an Allegro train produced by Alstom on the route between St Petersburg and Helsinki. This is still the only high-speed train which is intended to run outside Russia. But in terms of passenger traffic several directions are literally begging to be accelerated. And we need to integrate seamlessly into Europe’s high-speed transportation, opening not just a window but a door, which will be flooded with a steady flow of traffic.
 
Alexey Mironov,
Head of the Central Transportation Control Directorate
– The purpose of the Central Transportation Control Directorate is to consolidate efforts to create favorable conditions for the consignor and the consignee. 
After the «Second cargo company» is established the whole wagon park of RZD will be redistributed between the two cargo companies (First and Second), while the Transportation Control Directorate functions will also include management of the rolling stock.
The legal rules regulating rolling stock operation within Russian railways network should be changed. The new system will help manage the fleet of rolling stock and be competitive in terms of tariffs (the rolling stock owner can apply a rate lower than the one fixed for RZD).
 
 
 
 
Pavel Burtsev,
Deputy Head of the Oktyabrskaya Railway
– At first it is necessary to prepare all services and railway’ divisions to manage their economic activities themselves within the new vertical structure, and then gradually detach them into separate business units. 
This reveals the meaning of the entire reform. What is the true price of independent decision-making? There are no more long-term discussions over each decision, multiple restrictions on funds, limits and quantity. There is freedom instead. 
However any error leads to a decrease in the value of business, which will, in the long term, reduce the share prices of subsidiary companies. 
On the one hand, the management has its hands freed, and on the other, the whole business is at stake. This mechanism makes everyone act rationally and based on the real market conditions: without being pretentious, giving upward distortions and showing senseless heaps of figures in thousands of useless records.
This reflects not only the expectations of the company’s top management, but also the aspirations of ordinary performers. 
During the transition period, the railway departments will still operate which means two parallel systems of management working at the same time ensuring the succession of managing functions.
    [~DETAIL_TEXT] => 
Along the Vertical Line
By the end of this reform the central office of RZD will be a vertical structure, which will include sales, transportation control, infrastructure and locomotives directorates. The key objectives of the Concept of the management system of the holding company are the following: enhancing the management efficiency and attracting outside investment to the industry.
As world practice shows, the decisive condition for effective management, which will result in the enhancement of investment attractiveness, is free competition in the industry. Only in this case, each business enterprise, in order to stay on the market, is forced to run its business effectively. And this, in turn, forces the owners to hire professional managers, who are able to make effective decisions.
However, the railway has been a monopolist for several decades. It is planned to select those kinds of business activities that are potentially competitive, and detach them into separate business entities. This plan is now being realised. 
This is possible only through a transition from command and control management principles to corporate ones more typical of a holding company, into which RZD is being gradually transformed.

Who Controls the Traffic? 
The new Transportation Control Directorate consists of the three previously existing departments of RZD - transport control department, customs and brokering department and freight and commercial department. 
The first activities of the new directorate coincided with a difficult period of economic recession, and this set new tasks for the new subsidiary. “We have to reduce costs significantly. To achieve this, we should divide powers by type of activity, remove functional barriers in the work of our departments, optimise transportation control in terms of cooperation of different departments and increase accountability for the task accomplished,” said Vyacheslav Lemeshko, Vice President of RZD. 
According to Mr Lemeshko, the creation of the directorate meets the market’s requirements and fully complies with the new technological possibilities of traffic control at major sites on the network and transport corridors.
The structural organisation is as follows: the Central Transportation Control Directorate is now the head department, while each railway has its own regional directorate, which will incorporate regional centres within their structure. The basic level will include the station as well as mechanised divisions for loading and unloading operations and commercial operations. The final formation of the new structure will be completed in 2010.
The main advantages of the new system should be a centralised management, a clear division of roles and responsibilities between the units of the directorate and other departments. The effectiveness and efficiency of work will be enhanced by changing from a four-level management system of train and local work to a three-level system, excluding the branch department level.

Stakes are on the Warehouse
It is assumed that one of the main sources of income for the infrastructure company, into which RZD is gradually being transformed, will be the directorate for management of terminal and warehouse complex (DTWC). The decision to detach all the warehouse operations into a separate structure was reached in late summer.
At first, DTWC will function as a branch of RZD, i.e. on the same principles as other departments of the company currently work. This will allow the company to avoid risks, including those related to the need to detach the units limited in turnover which play a significant role in operating activities, as well as to test the management functions and the procedures of TWC divisions’ cooperation. In the future, the directorate may be transformed into a subsidiary structure of RZD, which will make it more customer-oriented and flexible to attract both investors and loan financing.
Today the volume of the company’s assets in the form of warehouses and areas – utilised to store and handle cargoes, as well as to perform a number of other functions – equals 5.6 million square metres. Given the fact that storage facilities across Russia, according to the experts, amount to 17 million square metres, RZD is potentially the largest participant in the market for storing goods. However, the assets’ quality and the management strategy leave much to be desired. A large of it are outdoor storage or poorly equipped premises, many of which is not in use. 
RZD does not possess class A (the highest category) units. Deterioration of the warehouses’ resources of RZD is rether great. It is worth noting that even a little part of the areas currently in use have brought the company 2.3 billion rubles in 2008. The company handled 110.6 million tons of cargo, most of which were containers (48%) and bulk cargo (37%). It can be assumed that, in future, revenue will multiply. The company representatives claim that by 2015 the share of RZD on the storage services market should grow significantly.
RZD’s warehouse park is perfectly located. It is reasonable to assume that the directorate’s or the subsidiary company’s services will be important for both cargo owners and railway operators. It is obvious that the newly established directorate will act in its own commercial interests and therefore will try to provide services to the widest range of possible customers. Moreover, the independent market participants in the transport market could become investors in certain attractive projects.
The optimal scheme might be BOT (build-operate-transfer), where an investor replaces a tumbledown building with a new one of the desired size and utilises it for a period (say, 10 years) before the warehouse becomes the property of RZD, and the investor turns into a tenant of this property.
In the future, the terminal business of RZD promises to become an independent large-scale logistics project. According to Vladimir Yakunin, President of RZD, it is planned to “create 35-40 modern terminal and logistics centres (TLC) on the railways in the major transportation hubs and industrial clusters” by 2030. For instance, the company considers the opportunities to attract Russian and foreign partners to build logistics centres in Moscow, Samara, Leningrad and Sverdlovsk regions.
“We can identify specific points to create logistics centres across the whole network. The attempts to build such centres in Moscow, which were not integrated into the railway infrastructure, have caused serious problems such as road congestion. Therefore, it seems to me that the intermodal logistics centre, constructed on the basis of RZD, will be significantly more effective than those similar objects that were attached, say, only to the roads,” adds Mr Yakunin.
Experts believe that high quality and a stable service at a reasonable price will make the work of the new directorate profitable. The idea is reasonable but it needs to be skillfully realised, say logistics market experts.

Locomotive divisions will be reorganised
A Directorate for Traction and the Directorate for Traction Rolling Stock Repair will be established on the basis of RZD Locomotive Facilities Department. The decision was taken in July, 2009. This reorganisation is aimed at improving the efficiency of locomotive facilities and optimising the costs and improving the quality of services provided by the company.
The existing system of locomotive control - territorial and functional - includes a four-level management system and contains a number of shortcomings in terms of clear division of functions, powers and responsibilities, as well as financial planning. Simultaneous and parallel control of locomotive repairing and maintenance activities makes the system even more complicated. When the new directorates are established, these two fields will be separated which enables the company to employ a three-level management model.
The principal activities of the Directorate for Traction will be the maintenance of the locomotives and locomotive crews for the planned volume of traffic and goods, as well as ensuring safety. The directorate will be supplied with a locomotive fleet (freight, passenger, shunting), energy laboratories and equipment for training and rehabilitation of locomotive brigades. The structure of the branch will include 15 road directorates for traction, 135 operational locomotive depots, including five compound depots. This will see the full integration of the locomotive directorate into a single technological process of cargo and passenger transportation.
The Directorate for Traction Rolling Stock Repair will carry out maintenance, routine repairs and overhaul of locomotives belonging to the locomotive directorate. The directorate will be given the appropriate property – servicing stations and locomotive depots. The structure of the branch will include 15 road directorate for traction rolling stock repair and 110 depots.
The level of specialisation will be maximized. In addition, the new organisation of work will allow regulation of  the financing of the locomotive facilities. Until now, it was carried out on the general principles of the company: funds were assigned immediately both for repairing and maintenance. The reorganisation will allow funds to be used more efficiently. 
The formation of the structural units of the two directorates will be completed by mid-2010. However the directorates at Oktyabrskaya, Krasnoyarsk and East-Siberian railways have already been created as pilot schemes.
For instance, the directorate for traction at the Oktyabrskaya Railway has been working since August 1. It includes the technical, industrial, financial and economic units, as well as divisions for personnel management and traffic safety. The directorate took over and now manages 14 depots. Its main function is to provide locomotives and crews for the transportation of cargo and passengers.
Separation of the operational and maintenance functions at Krasnoyarsk railway has already improved the quality and quantity figures of each service. There is another positive point as well. The directorate for traction now plans and organises the repair of locomotives. This means that it is possible to choose a contractor (i.e. depot) on the basis of their price and quality of work. Thus the depots, in their turn, will try not to lose their customers.
Now the share of locomotives accounts for up to 20% of total hardware failures. The increase in the level of specialisation will enhance the quality of repair, and this, in turn, will stimulate improvements in the conditions of locomotive operation, reduce the number of technical failures and non-productive losses.

Faster and faster
In 2009 the Directorate for High-Speed transportation, which is also a branch of RZD, was established to organise efficient high-speed transportation using a new generation of high-speed trains.
Development of high-speed transportation in Russia is hampered by a lack of infrastructure. However, even where it is already possible to develop a speed of 250 kph (for instance, on the route section Borovenka - Torbin between Moscow and St Petersburg) only fast trains, passenger trains and freight trains are running.
In other countries there are only a few pieces of railway which are used by all types of rolling stock. Over time, attitudes towards technology in traffic should change in Russia as well. Experts advise separating the high-speed passenger traffic from freight traffic in order to reduce the costs of maintaining the infrastructure.
Different attitudes towards the construction of railways should also appear. Most countries in Europe and Asia (China, in particular) tend to build entirely new tracks, rather than restoring the old ones. While in Germany they can safely close the whole area and carry out an overhaul and reconditioning due to the availability of bypass routes, it is still impossible to do the same in Russia. Do not forget that every intermission on a busy route – which requires careful planning and includes not only the repairing period itself but also the time to take the technical equipment away – is a costly undertaking. If parallel routes are available it could reduce these costs and provide real savings. These make the idea of connecting Moscow to nearby and remote regions through high-speed traffic very promising. The program of fast transportation development will run until 2030. 
Elena ushkova

viewpoint
Yrysbek Tashbaev
Deputy General Director STS/RLS-Logistics
– The decision to combine warehouse operations under a unified structure, which will make a kind of managing company, is correct. Instead of separate assets scattered over the railways and managed locally, a unified set of sales policies, tariffs and standards will be developed. In short, it means management centralisation, which is relevant in the current economic situation. Services have to be offered based on the preferences of the client and taking into account market conditions. Once this has happened the new directorate – as a managing company – will be successful.
First, they need to carry out an audit of all assets and then plan activities bearing in mind the perspectives of each individual unit and its investment needs. This program should be at the heart of the proposals to potential investors. I think RZD will have no difficulties in finding its partners, given the number of attractive competitive factors, such as the location, for example.
 
 
Oleg Ulyanov
Head of High-Speed Service Directorate
– First we need to dispel the myth existing in Russia that railway passenger transport cannot be prestigious and highly profitable. When we succeed, the attitude towards transportation and those people who use it will be completely different.
Next year we plan to put into operation an Allegro train produced by Alstom on the route between St Petersburg and Helsinki. This is still the only high-speed train which is intended to run outside Russia. But in terms of passenger traffic several directions are literally begging to be accelerated. And we need to integrate seamlessly into Europe’s high-speed transportation, opening not just a window but a door, which will be flooded with a steady flow of traffic.
 
Alexey Mironov,
Head of the Central Transportation Control Directorate
– The purpose of the Central Transportation Control Directorate is to consolidate efforts to create favorable conditions for the consignor and the consignee. 
After the «Second cargo company» is established the whole wagon park of RZD will be redistributed between the two cargo companies (First and Second), while the Transportation Control Directorate functions will also include management of the rolling stock.
The legal rules regulating rolling stock operation within Russian railways network should be changed. The new system will help manage the fleet of rolling stock and be competitive in terms of tariffs (the rolling stock owner can apply a rate lower than the one fixed for RZD).
 
 
 
 
Pavel Burtsev,
Deputy Head of the Oktyabrskaya Railway
– At first it is necessary to prepare all services and railway’ divisions to manage their economic activities themselves within the new vertical structure, and then gradually detach them into separate business units. 
This reveals the meaning of the entire reform. What is the true price of independent decision-making? There are no more long-term discussions over each decision, multiple restrictions on funds, limits and quantity. There is freedom instead. 
However any error leads to a decrease in the value of business, which will, in the long term, reduce the share prices of subsidiary companies. 
On the one hand, the management has its hands freed, and on the other, the whole business is at stake. This mechanism makes everyone act rationally and based on the real market conditions: without being pretentious, giving upward distortions and showing senseless heaps of figures in thousands of useless records.
This reflects not only the expectations of the company’s top management, but also the aspirations of ordinary performers. 
During the transition period, the railway departments will still operate which means two parallel systems of management working at the same time ensuring the succession of managing functions.
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    [DETAIL_TEXT] => In the current debate, we often hear a single argument: the railways should be opened up rapidly to broad “competition”, and the “market” will regulate itself. These ideas are usually voiced with regard to competition in the freight market, while private business is not interested in loss-making passenger services without guaranteed state compensation. 
I don’t deny that competition is a strong incentive to efficiency, but it is more a theoretical promise of giving the maximum return in a perfect market. Russia’s railway freight transport market, however, is still far from perfect.

Specifics of Russia’s system 
In Russia, the carrier’s responsibilities include not only transporting goods, but doing so publicly and providing equal access to the whole rail network, ensuring maintenance of the necessary infrastructure to meet the needs of special and military transport, and at rates set by the state. The latter aspect is particularly important, so I’ll focus on the specifics of Russia’s tariff system a bit more. 
Freight rates are averaged across the whole network, i.e. they are based on the average weighted cost spent on transporting one ton a distance of 10 kilometres. But the real cost of each transport can at times differ substantially from the estimated average over the whole network since it depends on many factors. 
Another specific feature of Russia’s tariff system is the high level of internal cross-subsidies in transporting some goods at the expense of others. For example, the tariff for transporting petroleum products is much higher than that for coal over the same distance. As a result, Russian Railways makes a profit from shipping petroleum, while the Company doesn’t even cover all its costs when transporting coal. Overall though, the Company does break even.
The third feature of the rates is that the carrier lacks any right to regulate them flexibly, even within a specific corridor. As a result, it cannot adapt to prices on the commodity markets. When metal prices are increasing, for example, but the tariff remains unchanged, the metal sector receives additional profit, and the state more taxes. But when the prices start falling, metal manufacturers demand that the government reduces the rates to maintain the profit levels already achieved. As a result, Russian Railways today is used more to satisfy the needs of the economy as a whole - its own commercial interests are not the top priority.
In addition, we are not only the carrier, we also own the railway infrastructure, which allows us to improve our efficiency when carrying out government tasks at the macro-level. But this also creates significant additional burdens for business. 

Reform Models 
It is obvious that developing competition in freight transport is impossible at the moment. This means we there are three major options: 
• to separate infrastructure from transport and then develop competition in transport activities throughout the network (the so-called European competition model); 
• to divide the whole rail network into several “parallel” directions of traffic and then develop competition among vertically integrated companies in parallel steps (the so-called American model); 
• to spin off specific geographical segments from the single transport market, with their own rules and where market-based pricing for freight shipments will apply, and require Russian Railways to carry out the rest of the work. 
There are a number of other ideas. The most popular is to spin off some “locomotive traction services” from the transport process and to develop competition within them. I have repeatedly posed in public the question of separating the business of locomotive traction services from the main activity of the carrier to the heads of the largest railway companies in Europe. They all give the same, definitive answer: this is a strange and harmful initiative which is capable of causing a serious deterioration in rail operations. Only Kazakhstan has such experience, and after several years of work, the country now understands that such a division is ineffective. 
Neither the European nor the American reform models are suitable for Russia in their pure forms. But not taking into account the experience of other countries is also short-sighted, so let’s analyze all three models. 
In theory, the separation of infrastructure from transport seems the most logical and market-friendly step - a natural monopoly is separated from potentially competitive businesses. But such a separation will create a lot of conflicts that require adjustments to most technological processes, increase the risks of the system’s operation and create a lot of new transactions. Russia’s experts have calculated that for such a division, the costs of transport would increase by between 30 to 50% on the current level today. Similar calculations have been made in America, with similar results obtained. 
The model of dividing the railways into several “parallel” companies in which infrastructure and transportation would be combined, is also theoretically feasible. But its disadvantages are obvious. Instead of just one single national monopoly, we would have several regional monopolies. An increase in tariff rates under these conditions is inevitable, and the losses to the economy resulting from the breakup of the single infrastructure would be very high. 
The third model, which is to create local zones where carriers compete, can be implemented with minimal risk. There are two ways of proceeding here: creating competition among several local carriers on the same route, or creating competition “for the route” by holding a tender for the right to serve any part of the network on terms established by the state for a period of five to ten years. 
Similar operational structures already exist in Russia, e.g. at Yakutia Railways and the Yamal Railway Company. 
Such a model can be tested on “dead-end” routes up to 1,000 kilometers long, where there are fewer safety risks and the greatest potential to improve efficiency by reorganising operations in the local geographic segment. In terms of rail transport in general, this model is the least risky, both technologically and economically.

Market development in practice 
All these models require systematic study and responsible solutions for these problematic issues. That is why I am not a supporter of the mindless development of competition between carriers just for its own sake. What is a private entrepreneur to do who wants to invest in the development of the rail business? 
Let us recall a few economic axioms. First, the investor seeks to maximise profit on the invested capital with minimal risk. Secondly, substantial capital and profits can be generated in imperfect markets, in particular due to the imperfections of institutions and the lack of balance between market forces. And finally, some are natural monopolies because that is the most economical way of doing business. 
All these axioms are confirmed in practice by the development of the rail transport services market in Russia. The best example is of course the development of the market for operators’ services. 
But against the backdrop of the positive results in attracting private investment to the industry, we also encountered a number of new problems. 
First of all, according to our estimates, the efficiency of the wagon fleet has declined by 10-15% as a result of the fragmentation - service operating companies delivering goods in certain types of cars before the crisis were almost 50% more expensive than similar Russian Railways’ cars. At the same time, competition in the operating business remains limited so far because the freight cars owned by Russian Railways operate according to regulated rates, while private cars are run on market principles. Restricting competition is yet another reason for the imbalance on the market. The operators, having virtually unlimited commercial flexibility, immediately selected the most technological and profitable shipments from the single transport process. 
The result is that the remaining unprofitable and low-tech transportation has been “inherited” by Russian Railways. Is this fair competition? 
As a result, the efficiency of the transport process has not increased overall due to the greater number of private cars now available - some have just skimmed off the cream, while others continue to carry out socially important public transport. For more than two years we have been trying to obtain a level playing field for business with regard to wagon operations. After lengthy discussions, we were able to create a subsidiary, Freight One, and are now trying to convince everyone of the need to set up a second freight company. This will ensure a level playing field for all market players, including Russian Railways. 
An even more interesting situation arises with regard to private locomotives. Under existing regulations, Russian Railways can carry cargo not only in private cars, but in trains consisting of wagons and locomotives belonging to the shipper. For such shipments, a special, and in our opinion unfair rate was invented under which, in some cases, Russian Railways receives only 30% of the total cost of a standard shipment, although we bear more than 60% of its cost. The current situation, where a state-owned company loses money for maintaining infrastructure, but where private locomotives take the profits, is obviously unhealthy. 

Opportunities for private owners 
At the same time, I continue to believe that the expansion of private business on the rail system will be confronted with systemic economic and technological constraints. 
Rail transport is a complex and very capital-intensive business. The payback period of most average projects in the cargo business at existing levels of rates exceeds fifteen years and the profitability of Russian Railways assets in 2008 amounted to just 0.4%. This means that the investor cannot count on an adequate level of dividends and that returns from the investment should not be reinvested in rail assets. 
Economic and technological barriers to entry to the transportation market are very high: to reach the minimum amount of business means investing billions of roubles. To recoup these funds in seven or eight years, transport profitability has to be increased by 20-30%. Expenditures on the part of a private carrier would be higher than that of Russian Railways, since he loses economies of scale, and the cost of transportation of one ton would increase. 
It is therefore necessary to raise rates. Most likely, additional charges will arise if the money is taken on credit. But the economy benefits little from such investments - services will become more expensive than its quality to the customer, risks to the system will increase and the use of infrastructure will deteriorate. 
That is why all over the world, the overwhelming proportion of investment in the railway sector is made directly by the state or through special leasing companies. 
We have a similar situation in Russia - the state-owned assets of Russian Railways give a 0.4% return on capital, but also provide support to industry and mobility and transport access to, from and within the country’s regions, as well as solving many other problems. If we want to replace government capital in the industry with private money – let’s prepare for the creation of conditions to guarantee its return, including an increase in rates. 
Russia’s transport industry also has a lot more simple technological, organizational and institutional spheres of activity requiring the development of private business and investment initiatives - and there are a lot of these in rail transport. 
Above all, this is industrial rail transport and rail transportation not for general use, which is a very large-scale segment, with more than 80,000 kilometres of track, thousands of locomotives, tens of thousands of cars and loading and unloading facilities... All this requires effective technological solutions and investments. This business is in most cases not regulated by the state, technical standards are less strict, and the risks from safety violations less. 
Private entrepreneurs are also able to develop the repair business and provide services in rolling stock, construction and the repair of infrastructure, as well as many other areas. 
A second ambitious area for the possible development of private business and transport activities is logistics, which is in its infancy in Russia compared to the standards in developed countries. 

Ten Steps 
So what kind of rail transport reform is required to meet the needs of the economy in crisis? 
Our answer: pragmatic reform, with no risk, which is also consistent, economically sound and able to make the entire rail system effective and efficient, rather than creating mechanisms for the redistribution of assets and perpetuating the already low profits in favour of a private investor. 
In fact, this is the kind of reform conceived more than ten years ago.
Today, when just over a year remains to the completion of the official reform programme, we know what to do in order to implement its stated principles in practice. 
First. Create fully-fledged competition between freight car operators, which requires that by the end of the year all cars should be transferred from Russian Railways to the Freight Two, the second freight company. Let this segment continue to develop according to the market, with all its advantages and disadvantages.
Second. Complete the process of separating the passenger business from the infrastructure and freight transport, creating for these areas a subsidiary Federal Passenger Company and continuing to set up suburban passenger companies. The state has to clarify the rules for government orders at both federal and regional levels – for the transport of passengers entitled to reduced fares and transport according to regulated, socially-oriented fares. Developing such a mechanism would guarantee the creation of conditions for the development of private carriers in a competitive environment for such state orders. Developing competition in this field based on franchises can be much easier and faster than in the cargo business. 
Third. Complete the spinoff from Russian Railways of non-core activities and develop among them a competitive market to attract private investment and skilled partners. 
Fourth. Organize the relationship between the government and Russian Railways as the infrastructure owner. A form of agreement is needed which defines the requirements of railway infrastructure intended for joint or common use, of its technical condition and its national coverage and the country’s development priorities. There is also the question of whether the country and the regions need little-used and unprofitable stations? It is also important that any such agreement provides for the sources of the funds needed to maintain and develop the infrastructure, and if the funds received by Russian Railways from its activities governed by regulated rates will be sufficient. 
Fifth. Start actively changing the system of freight rates. The current system hinders the development of relations between Russian Railways and its clients. When changing the system, it is vital to give Russian Railways the right to adjust the rates flexibly within a specific corridor, for example + / - 5% of the level established by the state according to transparent and understandable commercial criteria. 
Sixth. Create the right incentives to improve the efficiency of Russian Railways and scrap methods of regulating its activity based on cost. The government must determine a long-term tariff policy and reiterate its willingness to reimburse the Company for lost income if the rates are lower, thus providing an effective incentive to increase profits. A state programme could provide strong support by releasing rail employees and experts during the reform process.
Seventh. Adopt a system of measures to develop the rail industry in Russia and bring in foreign technologies in some areas. 
Eighth. Improve conditions for private businesses in those areas where there is no systemic risk from the reforms, but which can provide maximum impact, as discussed above. 
Ninth. Build new railway lines on the principles of public-private partnerships and start creating a network of high-speed dedicated lines. Solving these problems is a powerful anti-crisis measure, as evidenced by the experience of many countries.
Tenth. Consider an IPO of 20-25% of Russian Railways while maintaining absolute government control. The state would then receive funds for investment in new rail projects, while the preparations for an IPO would lead to greater transparency and the long-term sustainability of the Company’s business development. It would also attract private shareholders and investors. In addition, establishing a market price for Russian Railways shares on the stock exchange would create a very effective tool for public control and pressure on the management effectiveness. 
We believe that this approach to of reform is much more efficient for the government than the endless division and fragmentation of the industry and the expectation that pseudo-competition at the local levels of a unified system will be able to increase productivity and socio-economic efficiency in general. 

    [~DETAIL_TEXT] => In the current debate, we often hear a single argument: the railways should be opened up rapidly to broad “competition”, and the “market” will regulate itself. These ideas are usually voiced with regard to competition in the freight market, while private business is not interested in loss-making passenger services without guaranteed state compensation. 
I don’t deny that competition is a strong incentive to efficiency, but it is more a theoretical promise of giving the maximum return in a perfect market. Russia’s railway freight transport market, however, is still far from perfect.

Specifics of Russia’s system 
In Russia, the carrier’s responsibilities include not only transporting goods, but doing so publicly and providing equal access to the whole rail network, ensuring maintenance of the necessary infrastructure to meet the needs of special and military transport, and at rates set by the state. The latter aspect is particularly important, so I’ll focus on the specifics of Russia’s tariff system a bit more. 
Freight rates are averaged across the whole network, i.e. they are based on the average weighted cost spent on transporting one ton a distance of 10 kilometres. But the real cost of each transport can at times differ substantially from the estimated average over the whole network since it depends on many factors. 
Another specific feature of Russia’s tariff system is the high level of internal cross-subsidies in transporting some goods at the expense of others. For example, the tariff for transporting petroleum products is much higher than that for coal over the same distance. As a result, Russian Railways makes a profit from shipping petroleum, while the Company doesn’t even cover all its costs when transporting coal. Overall though, the Company does break even.
The third feature of the rates is that the carrier lacks any right to regulate them flexibly, even within a specific corridor. As a result, it cannot adapt to prices on the commodity markets. When metal prices are increasing, for example, but the tariff remains unchanged, the metal sector receives additional profit, and the state more taxes. But when the prices start falling, metal manufacturers demand that the government reduces the rates to maintain the profit levels already achieved. As a result, Russian Railways today is used more to satisfy the needs of the economy as a whole - its own commercial interests are not the top priority.
In addition, we are not only the carrier, we also own the railway infrastructure, which allows us to improve our efficiency when carrying out government tasks at the macro-level. But this also creates significant additional burdens for business. 

Reform Models 
It is obvious that developing competition in freight transport is impossible at the moment. This means we there are three major options: 
• to separate infrastructure from transport and then develop competition in transport activities throughout the network (the so-called European competition model); 
• to divide the whole rail network into several “parallel” directions of traffic and then develop competition among vertically integrated companies in parallel steps (the so-called American model); 
• to spin off specific geographical segments from the single transport market, with their own rules and where market-based pricing for freight shipments will apply, and require Russian Railways to carry out the rest of the work. 
There are a number of other ideas. The most popular is to spin off some “locomotive traction services” from the transport process and to develop competition within them. I have repeatedly posed in public the question of separating the business of locomotive traction services from the main activity of the carrier to the heads of the largest railway companies in Europe. They all give the same, definitive answer: this is a strange and harmful initiative which is capable of causing a serious deterioration in rail operations. Only Kazakhstan has such experience, and after several years of work, the country now understands that such a division is ineffective. 
Neither the European nor the American reform models are suitable for Russia in their pure forms. But not taking into account the experience of other countries is also short-sighted, so let’s analyze all three models. 
In theory, the separation of infrastructure from transport seems the most logical and market-friendly step - a natural monopoly is separated from potentially competitive businesses. But such a separation will create a lot of conflicts that require adjustments to most technological processes, increase the risks of the system’s operation and create a lot of new transactions. Russia’s experts have calculated that for such a division, the costs of transport would increase by between 30 to 50% on the current level today. Similar calculations have been made in America, with similar results obtained. 
The model of dividing the railways into several “parallel” companies in which infrastructure and transportation would be combined, is also theoretically feasible. But its disadvantages are obvious. Instead of just one single national monopoly, we would have several regional monopolies. An increase in tariff rates under these conditions is inevitable, and the losses to the economy resulting from the breakup of the single infrastructure would be very high. 
The third model, which is to create local zones where carriers compete, can be implemented with minimal risk. There are two ways of proceeding here: creating competition among several local carriers on the same route, or creating competition “for the route” by holding a tender for the right to serve any part of the network on terms established by the state for a period of five to ten years. 
Similar operational structures already exist in Russia, e.g. at Yakutia Railways and the Yamal Railway Company. 
Such a model can be tested on “dead-end” routes up to 1,000 kilometers long, where there are fewer safety risks and the greatest potential to improve efficiency by reorganising operations in the local geographic segment. In terms of rail transport in general, this model is the least risky, both technologically and economically.

Market development in practice 
All these models require systematic study and responsible solutions for these problematic issues. That is why I am not a supporter of the mindless development of competition between carriers just for its own sake. What is a private entrepreneur to do who wants to invest in the development of the rail business? 
Let us recall a few economic axioms. First, the investor seeks to maximise profit on the invested capital with minimal risk. Secondly, substantial capital and profits can be generated in imperfect markets, in particular due to the imperfections of institutions and the lack of balance between market forces. And finally, some are natural monopolies because that is the most economical way of doing business. 
All these axioms are confirmed in practice by the development of the rail transport services market in Russia. The best example is of course the development of the market for operators’ services. 
But against the backdrop of the positive results in attracting private investment to the industry, we also encountered a number of new problems. 
First of all, according to our estimates, the efficiency of the wagon fleet has declined by 10-15% as a result of the fragmentation - service operating companies delivering goods in certain types of cars before the crisis were almost 50% more expensive than similar Russian Railways’ cars. At the same time, competition in the operating business remains limited so far because the freight cars owned by Russian Railways operate according to regulated rates, while private cars are run on market principles. Restricting competition is yet another reason for the imbalance on the market. The operators, having virtually unlimited commercial flexibility, immediately selected the most technological and profitable shipments from the single transport process. 
The result is that the remaining unprofitable and low-tech transportation has been “inherited” by Russian Railways. Is this fair competition? 
As a result, the efficiency of the transport process has not increased overall due to the greater number of private cars now available - some have just skimmed off the cream, while others continue to carry out socially important public transport. For more than two years we have been trying to obtain a level playing field for business with regard to wagon operations. After lengthy discussions, we were able to create a subsidiary, Freight One, and are now trying to convince everyone of the need to set up a second freight company. This will ensure a level playing field for all market players, including Russian Railways. 
An even more interesting situation arises with regard to private locomotives. Under existing regulations, Russian Railways can carry cargo not only in private cars, but in trains consisting of wagons and locomotives belonging to the shipper. For such shipments, a special, and in our opinion unfair rate was invented under which, in some cases, Russian Railways receives only 30% of the total cost of a standard shipment, although we bear more than 60% of its cost. The current situation, where a state-owned company loses money for maintaining infrastructure, but where private locomotives take the profits, is obviously unhealthy. 

Opportunities for private owners 
At the same time, I continue to believe that the expansion of private business on the rail system will be confronted with systemic economic and technological constraints. 
Rail transport is a complex and very capital-intensive business. The payback period of most average projects in the cargo business at existing levels of rates exceeds fifteen years and the profitability of Russian Railways assets in 2008 amounted to just 0.4%. This means that the investor cannot count on an adequate level of dividends and that returns from the investment should not be reinvested in rail assets. 
Economic and technological barriers to entry to the transportation market are very high: to reach the minimum amount of business means investing billions of roubles. To recoup these funds in seven or eight years, transport profitability has to be increased by 20-30%. Expenditures on the part of a private carrier would be higher than that of Russian Railways, since he loses economies of scale, and the cost of transportation of one ton would increase. 
It is therefore necessary to raise rates. Most likely, additional charges will arise if the money is taken on credit. But the economy benefits little from such investments - services will become more expensive than its quality to the customer, risks to the system will increase and the use of infrastructure will deteriorate. 
That is why all over the world, the overwhelming proportion of investment in the railway sector is made directly by the state or through special leasing companies. 
We have a similar situation in Russia - the state-owned assets of Russian Railways give a 0.4% return on capital, but also provide support to industry and mobility and transport access to, from and within the country’s regions, as well as solving many other problems. If we want to replace government capital in the industry with private money – let’s prepare for the creation of conditions to guarantee its return, including an increase in rates. 
Russia’s transport industry also has a lot more simple technological, organizational and institutional spheres of activity requiring the development of private business and investment initiatives - and there are a lot of these in rail transport. 
Above all, this is industrial rail transport and rail transportation not for general use, which is a very large-scale segment, with more than 80,000 kilometres of track, thousands of locomotives, tens of thousands of cars and loading and unloading facilities... All this requires effective technological solutions and investments. This business is in most cases not regulated by the state, technical standards are less strict, and the risks from safety violations less. 
Private entrepreneurs are also able to develop the repair business and provide services in rolling stock, construction and the repair of infrastructure, as well as many other areas. 
A second ambitious area for the possible development of private business and transport activities is logistics, which is in its infancy in Russia compared to the standards in developed countries. 

Ten Steps 
So what kind of rail transport reform is required to meet the needs of the economy in crisis? 
Our answer: pragmatic reform, with no risk, which is also consistent, economically sound and able to make the entire rail system effective and efficient, rather than creating mechanisms for the redistribution of assets and perpetuating the already low profits in favour of a private investor. 
In fact, this is the kind of reform conceived more than ten years ago.
Today, when just over a year remains to the completion of the official reform programme, we know what to do in order to implement its stated principles in practice. 
First. Create fully-fledged competition between freight car operators, which requires that by the end of the year all cars should be transferred from Russian Railways to the Freight Two, the second freight company. Let this segment continue to develop according to the market, with all its advantages and disadvantages.
Second. Complete the process of separating the passenger business from the infrastructure and freight transport, creating for these areas a subsidiary Federal Passenger Company and continuing to set up suburban passenger companies. The state has to clarify the rules for government orders at both federal and regional levels – for the transport of passengers entitled to reduced fares and transport according to regulated, socially-oriented fares. Developing such a mechanism would guarantee the creation of conditions for the development of private carriers in a competitive environment for such state orders. Developing competition in this field based on franchises can be much easier and faster than in the cargo business. 
Third. Complete the spinoff from Russian Railways of non-core activities and develop among them a competitive market to attract private investment and skilled partners. 
Fourth. Organize the relationship between the government and Russian Railways as the infrastructure owner. A form of agreement is needed which defines the requirements of railway infrastructure intended for joint or common use, of its technical condition and its national coverage and the country’s development priorities. There is also the question of whether the country and the regions need little-used and unprofitable stations? It is also important that any such agreement provides for the sources of the funds needed to maintain and develop the infrastructure, and if the funds received by Russian Railways from its activities governed by regulated rates will be sufficient. 
Fifth. Start actively changing the system of freight rates. The current system hinders the development of relations between Russian Railways and its clients. When changing the system, it is vital to give Russian Railways the right to adjust the rates flexibly within a specific corridor, for example + / - 5% of the level established by the state according to transparent and understandable commercial criteria. 
Sixth. Create the right incentives to improve the efficiency of Russian Railways and scrap methods of regulating its activity based on cost. The government must determine a long-term tariff policy and reiterate its willingness to reimburse the Company for lost income if the rates are lower, thus providing an effective incentive to increase profits. A state programme could provide strong support by releasing rail employees and experts during the reform process.
Seventh. Adopt a system of measures to develop the rail industry in Russia and bring in foreign technologies in some areas. 
Eighth. Improve conditions for private businesses in those areas where there is no systemic risk from the reforms, but which can provide maximum impact, as discussed above. 
Ninth. Build new railway lines on the principles of public-private partnerships and start creating a network of high-speed dedicated lines. Solving these problems is a powerful anti-crisis measure, as evidenced by the experience of many countries.
Tenth. Consider an IPO of 20-25% of Russian Railways while maintaining absolute government control. The state would then receive funds for investment in new rail projects, while the preparations for an IPO would lead to greater transparency and the long-term sustainability of the Company’s business development. It would also attract private shareholders and investors. In addition, establishing a market price for Russian Railways shares on the stock exchange would create a very effective tool for public control and pressure on the management effectiveness. 
We believe that this approach to of reform is much more efficient for the government than the endless division and fragmentation of the industry and the expectation that pseudo-competition at the local levels of a unified system will be able to increase productivity and socio-economic efficiency in general. 

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            [SECTION_META_DESCRIPTION] => <img src="/ufiles/image/rus/partner/2009/4/2.jpg" border="1" alt=" " hspace="5" width="200" height="221" align="left" />Rail reform has already been underway in Russia for more than ten years, but the debate about whether or not the industry actually needs reform has never ceased. Some believe that reform should be stopped during the economic crisis, while others believe that this is time to hand over the dominant role in passenger and freight transport to private business which, they maintain, is ready to solve all the problems and strategic challenges facing the industry.
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            [ELEMENT_META_DESCRIPTION] => <img src="/ufiles/image/rus/partner/2009/4/2.jpg" border="1" alt=" " hspace="5" width="200" height="221" align="left" />Rail reform has already been underway in Russia for more than ten years, but the debate about whether or not the industry actually needs reform has never ceased. Some believe that reform should be stopped during the economic crisis, while others believe that this is time to hand over the dominant role in passenger and freight transport to private business which, they maintain, is ready to solve all the problems and strategic challenges facing the industry.
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    [DETAIL_TEXT] => In the current debate, we often hear a single argument: the railways should be opened up rapidly to broad “competition”, and the “market” will regulate itself. These ideas are usually voiced with regard to competition in the freight market, while private business is not interested in loss-making passenger services without guaranteed state compensation. 
I don’t deny that competition is a strong incentive to efficiency, but it is more a theoretical promise of giving the maximum return in a perfect market. Russia’s railway freight transport market, however, is still far from perfect.

Specifics of Russia’s system 
In Russia, the carrier’s responsibilities include not only transporting goods, but doing so publicly and providing equal access to the whole rail network, ensuring maintenance of the necessary infrastructure to meet the needs of special and military transport, and at rates set by the state. The latter aspect is particularly important, so I’ll focus on the specifics of Russia’s tariff system a bit more. 
Freight rates are averaged across the whole network, i.e. they are based on the average weighted cost spent on transporting one ton a distance of 10 kilometres. But the real cost of each transport can at times differ substantially from the estimated average over the whole network since it depends on many factors. 
Another specific feature of Russia’s tariff system is the high level of internal cross-subsidies in transporting some goods at the expense of others. For example, the tariff for transporting petroleum products is much higher than that for coal over the same distance. As a result, Russian Railways makes a profit from shipping petroleum, while the Company doesn’t even cover all its costs when transporting coal. Overall though, the Company does break even.
The third feature of the rates is that the carrier lacks any right to regulate them flexibly, even within a specific corridor. As a result, it cannot adapt to prices on the commodity markets. When metal prices are increasing, for example, but the tariff remains unchanged, the metal sector receives additional profit, and the state more taxes. But when the prices start falling, metal manufacturers demand that the government reduces the rates to maintain the profit levels already achieved. As a result, Russian Railways today is used more to satisfy the needs of the economy as a whole - its own commercial interests are not the top priority.
In addition, we are not only the carrier, we also own the railway infrastructure, which allows us to improve our efficiency when carrying out government tasks at the macro-level. But this also creates significant additional burdens for business. 

Reform Models 
It is obvious that developing competition in freight transport is impossible at the moment. This means we there are three major options: 
• to separate infrastructure from transport and then develop competition in transport activities throughout the network (the so-called European competition model); 
• to divide the whole rail network into several “parallel” directions of traffic and then develop competition among vertically integrated companies in parallel steps (the so-called American model); 
• to spin off specific geographical segments from the single transport market, with their own rules and where market-based pricing for freight shipments will apply, and require Russian Railways to carry out the rest of the work. 
There are a number of other ideas. The most popular is to spin off some “locomotive traction services” from the transport process and to develop competition within them. I have repeatedly posed in public the question of separating the business of locomotive traction services from the main activity of the carrier to the heads of the largest railway companies in Europe. They all give the same, definitive answer: this is a strange and harmful initiative which is capable of causing a serious deterioration in rail operations. Only Kazakhstan has such experience, and after several years of work, the country now understands that such a division is ineffective. 
Neither the European nor the American reform models are suitable for Russia in their pure forms. But not taking into account the experience of other countries is also short-sighted, so let’s analyze all three models. 
In theory, the separation of infrastructure from transport seems the most logical and market-friendly step - a natural monopoly is separated from potentially competitive businesses. But such a separation will create a lot of conflicts that require adjustments to most technological processes, increase the risks of the system’s operation and create a lot of new transactions. Russia’s experts have calculated that for such a division, the costs of transport would increase by between 30 to 50% on the current level today. Similar calculations have been made in America, with similar results obtained. 
The model of dividing the railways into several “parallel” companies in which infrastructure and transportation would be combined, is also theoretically feasible. But its disadvantages are obvious. Instead of just one single national monopoly, we would have several regional monopolies. An increase in tariff rates under these conditions is inevitable, and the losses to the economy resulting from the breakup of the single infrastructure would be very high. 
The third model, which is to create local zones where carriers compete, can be implemented with minimal risk. There are two ways of proceeding here: creating competition among several local carriers on the same route, or creating competition “for the route” by holding a tender for the right to serve any part of the network on terms established by the state for a period of five to ten years. 
Similar operational structures already exist in Russia, e.g. at Yakutia Railways and the Yamal Railway Company. 
Such a model can be tested on “dead-end” routes up to 1,000 kilometers long, where there are fewer safety risks and the greatest potential to improve efficiency by reorganising operations in the local geographic segment. In terms of rail transport in general, this model is the least risky, both technologically and economically.

Market development in practice 
All these models require systematic study and responsible solutions for these problematic issues. That is why I am not a supporter of the mindless development of competition between carriers just for its own sake. What is a private entrepreneur to do who wants to invest in the development of the rail business? 
Let us recall a few economic axioms. First, the investor seeks to maximise profit on the invested capital with minimal risk. Secondly, substantial capital and profits can be generated in imperfect markets, in particular due to the imperfections of institutions and the lack of balance between market forces. And finally, some are natural monopolies because that is the most economical way of doing business. 
All these axioms are confirmed in practice by the development of the rail transport services market in Russia. The best example is of course the development of the market for operators’ services. 
But against the backdrop of the positive results in attracting private investment to the industry, we also encountered a number of new problems. 
First of all, according to our estimates, the efficiency of the wagon fleet has declined by 10-15% as a result of the fragmentation - service operating companies delivering goods in certain types of cars before the crisis were almost 50% more expensive than similar Russian Railways’ cars. At the same time, competition in the operating business remains limited so far because the freight cars owned by Russian Railways operate according to regulated rates, while private cars are run on market principles. Restricting competition is yet another reason for the imbalance on the market. The operators, having virtually unlimited commercial flexibility, immediately selected the most technological and profitable shipments from the single transport process. 
The result is that the remaining unprofitable and low-tech transportation has been “inherited” by Russian Railways. Is this fair competition? 
As a result, the efficiency of the transport process has not increased overall due to the greater number of private cars now available - some have just skimmed off the cream, while others continue to carry out socially important public transport. For more than two years we have been trying to obtain a level playing field for business with regard to wagon operations. After lengthy discussions, we were able to create a subsidiary, Freight One, and are now trying to convince everyone of the need to set up a second freight company. This will ensure a level playing field for all market players, including Russian Railways. 
An even more interesting situation arises with regard to private locomotives. Under existing regulations, Russian Railways can carry cargo not only in private cars, but in trains consisting of wagons and locomotives belonging to the shipper. For such shipments, a special, and in our opinion unfair rate was invented under which, in some cases, Russian Railways receives only 30% of the total cost of a standard shipment, although we bear more than 60% of its cost. The current situation, where a state-owned company loses money for maintaining infrastructure, but where private locomotives take the profits, is obviously unhealthy. 

Opportunities for private owners 
At the same time, I continue to believe that the expansion of private business on the rail system will be confronted with systemic economic and technological constraints. 
Rail transport is a complex and very capital-intensive business. The payback period of most average projects in the cargo business at existing levels of rates exceeds fifteen years and the profitability of Russian Railways assets in 2008 amounted to just 0.4%. This means that the investor cannot count on an adequate level of dividends and that returns from the investment should not be reinvested in rail assets. 
Economic and technological barriers to entry to the transportation market are very high: to reach the minimum amount of business means investing billions of roubles. To recoup these funds in seven or eight years, transport profitability has to be increased by 20-30%. Expenditures on the part of a private carrier would be higher than that of Russian Railways, since he loses economies of scale, and the cost of transportation of one ton would increase. 
It is therefore necessary to raise rates. Most likely, additional charges will arise if the money is taken on credit. But the economy benefits little from such investments - services will become more expensive than its quality to the customer, risks to the system will increase and the use of infrastructure will deteriorate. 
That is why all over the world, the overwhelming proportion of investment in the railway sector is made directly by the state or through special leasing companies. 
We have a similar situation in Russia - the state-owned assets of Russian Railways give a 0.4% return on capital, but also provide support to industry and mobility and transport access to, from and within the country’s regions, as well as solving many other problems. If we want to replace government capital in the industry with private money – let’s prepare for the creation of conditions to guarantee its return, including an increase in rates. 
Russia’s transport industry also has a lot more simple technological, organizational and institutional spheres of activity requiring the development of private business and investment initiatives - and there are a lot of these in rail transport. 
Above all, this is industrial rail transport and rail transportation not for general use, which is a very large-scale segment, with more than 80,000 kilometres of track, thousands of locomotives, tens of thousands of cars and loading and unloading facilities... All this requires effective technological solutions and investments. This business is in most cases not regulated by the state, technical standards are less strict, and the risks from safety violations less. 
Private entrepreneurs are also able to develop the repair business and provide services in rolling stock, construction and the repair of infrastructure, as well as many other areas. 
A second ambitious area for the possible development of private business and transport activities is logistics, which is in its infancy in Russia compared to the standards in developed countries. 

Ten Steps 
So what kind of rail transport reform is required to meet the needs of the economy in crisis? 
Our answer: pragmatic reform, with no risk, which is also consistent, economically sound and able to make the entire rail system effective and efficient, rather than creating mechanisms for the redistribution of assets and perpetuating the already low profits in favour of a private investor. 
In fact, this is the kind of reform conceived more than ten years ago.
Today, when just over a year remains to the completion of the official reform programme, we know what to do in order to implement its stated principles in practice. 
First. Create fully-fledged competition between freight car operators, which requires that by the end of the year all cars should be transferred from Russian Railways to the Freight Two, the second freight company. Let this segment continue to develop according to the market, with all its advantages and disadvantages.
Second. Complete the process of separating the passenger business from the infrastructure and freight transport, creating for these areas a subsidiary Federal Passenger Company and continuing to set up suburban passenger companies. The state has to clarify the rules for government orders at both federal and regional levels – for the transport of passengers entitled to reduced fares and transport according to regulated, socially-oriented fares. Developing such a mechanism would guarantee the creation of conditions for the development of private carriers in a competitive environment for such state orders. Developing competition in this field based on franchises can be much easier and faster than in the cargo business. 
Third. Complete the spinoff from Russian Railways of non-core activities and develop among them a competitive market to attract private investment and skilled partners. 
Fourth. Organize the relationship between the government and Russian Railways as the infrastructure owner. A form of agreement is needed which defines the requirements of railway infrastructure intended for joint or common use, of its technical condition and its national coverage and the country’s development priorities. There is also the question of whether the country and the regions need little-used and unprofitable stations? It is also important that any such agreement provides for the sources of the funds needed to maintain and develop the infrastructure, and if the funds received by Russian Railways from its activities governed by regulated rates will be sufficient. 
Fifth. Start actively changing the system of freight rates. The current system hinders the development of relations between Russian Railways and its clients. When changing the system, it is vital to give Russian Railways the right to adjust the rates flexibly within a specific corridor, for example + / - 5% of the level established by the state according to transparent and understandable commercial criteria. 
Sixth. Create the right incentives to improve the efficiency of Russian Railways and scrap methods of regulating its activity based on cost. The government must determine a long-term tariff policy and reiterate its willingness to reimburse the Company for lost income if the rates are lower, thus providing an effective incentive to increase profits. A state programme could provide strong support by releasing rail employees and experts during the reform process.
Seventh. Adopt a system of measures to develop the rail industry in Russia and bring in foreign technologies in some areas. 
Eighth. Improve conditions for private businesses in those areas where there is no systemic risk from the reforms, but which can provide maximum impact, as discussed above. 
Ninth. Build new railway lines on the principles of public-private partnerships and start creating a network of high-speed dedicated lines. Solving these problems is a powerful anti-crisis measure, as evidenced by the experience of many countries.
Tenth. Consider an IPO of 20-25% of Russian Railways while maintaining absolute government control. The state would then receive funds for investment in new rail projects, while the preparations for an IPO would lead to greater transparency and the long-term sustainability of the Company’s business development. It would also attract private shareholders and investors. In addition, establishing a market price for Russian Railways shares on the stock exchange would create a very effective tool for public control and pressure on the management effectiveness. 
We believe that this approach to of reform is much more efficient for the government than the endless division and fragmentation of the industry and the expectation that pseudo-competition at the local levels of a unified system will be able to increase productivity and socio-economic efficiency in general. 

    [~DETAIL_TEXT] => In the current debate, we often hear a single argument: the railways should be opened up rapidly to broad “competition”, and the “market” will regulate itself. These ideas are usually voiced with regard to competition in the freight market, while private business is not interested in loss-making passenger services without guaranteed state compensation. 
I don’t deny that competition is a strong incentive to efficiency, but it is more a theoretical promise of giving the maximum return in a perfect market. Russia’s railway freight transport market, however, is still far from perfect.

Specifics of Russia’s system 
In Russia, the carrier’s responsibilities include not only transporting goods, but doing so publicly and providing equal access to the whole rail network, ensuring maintenance of the necessary infrastructure to meet the needs of special and military transport, and at rates set by the state. The latter aspect is particularly important, so I’ll focus on the specifics of Russia’s tariff system a bit more. 
Freight rates are averaged across the whole network, i.e. they are based on the average weighted cost spent on transporting one ton a distance of 10 kilometres. But the real cost of each transport can at times differ substantially from the estimated average over the whole network since it depends on many factors. 
Another specific feature of Russia’s tariff system is the high level of internal cross-subsidies in transporting some goods at the expense of others. For example, the tariff for transporting petroleum products is much higher than that for coal over the same distance. As a result, Russian Railways makes a profit from shipping petroleum, while the Company doesn’t even cover all its costs when transporting coal. Overall though, the Company does break even.
The third feature of the rates is that the carrier lacks any right to regulate them flexibly, even within a specific corridor. As a result, it cannot adapt to prices on the commodity markets. When metal prices are increasing, for example, but the tariff remains unchanged, the metal sector receives additional profit, and the state more taxes. But when the prices start falling, metal manufacturers demand that the government reduces the rates to maintain the profit levels already achieved. As a result, Russian Railways today is used more to satisfy the needs of the economy as a whole - its own commercial interests are not the top priority.
In addition, we are not only the carrier, we also own the railway infrastructure, which allows us to improve our efficiency when carrying out government tasks at the macro-level. But this also creates significant additional burdens for business. 

Reform Models 
It is obvious that developing competition in freight transport is impossible at the moment. This means we there are three major options: 
• to separate infrastructure from transport and then develop competition in transport activities throughout the network (the so-called European competition model); 
• to divide the whole rail network into several “parallel” directions of traffic and then develop competition among vertically integrated companies in parallel steps (the so-called American model); 
• to spin off specific geographical segments from the single transport market, with their own rules and where market-based pricing for freight shipments will apply, and require Russian Railways to carry out the rest of the work. 
There are a number of other ideas. The most popular is to spin off some “locomotive traction services” from the transport process and to develop competition within them. I have repeatedly posed in public the question of separating the business of locomotive traction services from the main activity of the carrier to the heads of the largest railway companies in Europe. They all give the same, definitive answer: this is a strange and harmful initiative which is capable of causing a serious deterioration in rail operations. Only Kazakhstan has such experience, and after several years of work, the country now understands that such a division is ineffective. 
Neither the European nor the American reform models are suitable for Russia in their pure forms. But not taking into account the experience of other countries is also short-sighted, so let’s analyze all three models. 
In theory, the separation of infrastructure from transport seems the most logical and market-friendly step - a natural monopoly is separated from potentially competitive businesses. But such a separation will create a lot of conflicts that require adjustments to most technological processes, increase the risks of the system’s operation and create a lot of new transactions. Russia’s experts have calculated that for such a division, the costs of transport would increase by between 30 to 50% on the current level today. Similar calculations have been made in America, with similar results obtained. 
The model of dividing the railways into several “parallel” companies in which infrastructure and transportation would be combined, is also theoretically feasible. But its disadvantages are obvious. Instead of just one single national monopoly, we would have several regional monopolies. An increase in tariff rates under these conditions is inevitable, and the losses to the economy resulting from the breakup of the single infrastructure would be very high. 
The third model, which is to create local zones where carriers compete, can be implemented with minimal risk. There are two ways of proceeding here: creating competition among several local carriers on the same route, or creating competition “for the route” by holding a tender for the right to serve any part of the network on terms established by the state for a period of five to ten years. 
Similar operational structures already exist in Russia, e.g. at Yakutia Railways and the Yamal Railway Company. 
Such a model can be tested on “dead-end” routes up to 1,000 kilometers long, where there are fewer safety risks and the greatest potential to improve efficiency by reorganising operations in the local geographic segment. In terms of rail transport in general, this model is the least risky, both technologically and economically.

Market development in practice 
All these models require systematic study and responsible solutions for these problematic issues. That is why I am not a supporter of the mindless development of competition between carriers just for its own sake. What is a private entrepreneur to do who wants to invest in the development of the rail business? 
Let us recall a few economic axioms. First, the investor seeks to maximise profit on the invested capital with minimal risk. Secondly, substantial capital and profits can be generated in imperfect markets, in particular due to the imperfections of institutions and the lack of balance between market forces. And finally, some are natural monopolies because that is the most economical way of doing business. 
All these axioms are confirmed in practice by the development of the rail transport services market in Russia. The best example is of course the development of the market for operators’ services. 
But against the backdrop of the positive results in attracting private investment to the industry, we also encountered a number of new problems. 
First of all, according to our estimates, the efficiency of the wagon fleet has declined by 10-15% as a result of the fragmentation - service operating companies delivering goods in certain types of cars before the crisis were almost 50% more expensive than similar Russian Railways’ cars. At the same time, competition in the operating business remains limited so far because the freight cars owned by Russian Railways operate according to regulated rates, while private cars are run on market principles. Restricting competition is yet another reason for the imbalance on the market. The operators, having virtually unlimited commercial flexibility, immediately selected the most technological and profitable shipments from the single transport process. 
The result is that the remaining unprofitable and low-tech transportation has been “inherited” by Russian Railways. Is this fair competition? 
As a result, the efficiency of the transport process has not increased overall due to the greater number of private cars now available - some have just skimmed off the cream, while others continue to carry out socially important public transport. For more than two years we have been trying to obtain a level playing field for business with regard to wagon operations. After lengthy discussions, we were able to create a subsidiary, Freight One, and are now trying to convince everyone of the need to set up a second freight company. This will ensure a level playing field for all market players, including Russian Railways. 
An even more interesting situation arises with regard to private locomotives. Under existing regulations, Russian Railways can carry cargo not only in private cars, but in trains consisting of wagons and locomotives belonging to the shipper. For such shipments, a special, and in our opinion unfair rate was invented under which, in some cases, Russian Railways receives only 30% of the total cost of a standard shipment, although we bear more than 60% of its cost. The current situation, where a state-owned company loses money for maintaining infrastructure, but where private locomotives take the profits, is obviously unhealthy. 

Opportunities for private owners 
At the same time, I continue to believe that the expansion of private business on the rail system will be confronted with systemic economic and technological constraints. 
Rail transport is a complex and very capital-intensive business. The payback period of most average projects in the cargo business at existing levels of rates exceeds fifteen years and the profitability of Russian Railways assets in 2008 amounted to just 0.4%. This means that the investor cannot count on an adequate level of dividends and that returns from the investment should not be reinvested in rail assets. 
Economic and technological barriers to entry to the transportation market are very high: to reach the minimum amount of business means investing billions of roubles. To recoup these funds in seven or eight years, transport profitability has to be increased by 20-30%. Expenditures on the part of a private carrier would be higher than that of Russian Railways, since he loses economies of scale, and the cost of transportation of one ton would increase. 
It is therefore necessary to raise rates. Most likely, additional charges will arise if the money is taken on credit. But the economy benefits little from such investments - services will become more expensive than its quality to the customer, risks to the system will increase and the use of infrastructure will deteriorate. 
That is why all over the world, the overwhelming proportion of investment in the railway sector is made directly by the state or through special leasing companies. 
We have a similar situation in Russia - the state-owned assets of Russian Railways give a 0.4% return on capital, but also provide support to industry and mobility and transport access to, from and within the country’s regions, as well as solving many other problems. If we want to replace government capital in the industry with private money – let’s prepare for the creation of conditions to guarantee its return, including an increase in rates. 
Russia’s transport industry also has a lot more simple technological, organizational and institutional spheres of activity requiring the development of private business and investment initiatives - and there are a lot of these in rail transport. 
Above all, this is industrial rail transport and rail transportation not for general use, which is a very large-scale segment, with more than 80,000 kilometres of track, thousands of locomotives, tens of thousands of cars and loading and unloading facilities... All this requires effective technological solutions and investments. This business is in most cases not regulated by the state, technical standards are less strict, and the risks from safety violations less. 
Private entrepreneurs are also able to develop the repair business and provide services in rolling stock, construction and the repair of infrastructure, as well as many other areas. 
A second ambitious area for the possible development of private business and transport activities is logistics, which is in its infancy in Russia compared to the standards in developed countries. 

Ten Steps 
So what kind of rail transport reform is required to meet the needs of the economy in crisis? 
Our answer: pragmatic reform, with no risk, which is also consistent, economically sound and able to make the entire rail system effective and efficient, rather than creating mechanisms for the redistribution of assets and perpetuating the already low profits in favour of a private investor. 
In fact, this is the kind of reform conceived more than ten years ago.
Today, when just over a year remains to the completion of the official reform programme, we know what to do in order to implement its stated principles in practice. 
First. Create fully-fledged competition between freight car operators, which requires that by the end of the year all cars should be transferred from Russian Railways to the Freight Two, the second freight company. Let this segment continue to develop according to the market, with all its advantages and disadvantages.
Second. Complete the process of separating the passenger business from the infrastructure and freight transport, creating for these areas a subsidiary Federal Passenger Company and continuing to set up suburban passenger companies. The state has to clarify the rules for government orders at both federal and regional levels – for the transport of passengers entitled to reduced fares and transport according to regulated, socially-oriented fares. Developing such a mechanism would guarantee the creation of conditions for the development of private carriers in a competitive environment for such state orders. Developing competition in this field based on franchises can be much easier and faster than in the cargo business. 
Third. Complete the spinoff from Russian Railways of non-core activities and develop among them a competitive market to attract private investment and skilled partners. 
Fourth. Organize the relationship between the government and Russian Railways as the infrastructure owner. A form of agreement is needed which defines the requirements of railway infrastructure intended for joint or common use, of its technical condition and its national coverage and the country’s development priorities. There is also the question of whether the country and the regions need little-used and unprofitable stations? It is also important that any such agreement provides for the sources of the funds needed to maintain and develop the infrastructure, and if the funds received by Russian Railways from its activities governed by regulated rates will be sufficient. 
Fifth. Start actively changing the system of freight rates. The current system hinders the development of relations between Russian Railways and its clients. When changing the system, it is vital to give Russian Railways the right to adjust the rates flexibly within a specific corridor, for example + / - 5% of the level established by the state according to transparent and understandable commercial criteria. 
Sixth. Create the right incentives to improve the efficiency of Russian Railways and scrap methods of regulating its activity based on cost. The government must determine a long-term tariff policy and reiterate its willingness to reimburse the Company for lost income if the rates are lower, thus providing an effective incentive to increase profits. A state programme could provide strong support by releasing rail employees and experts during the reform process.
Seventh. Adopt a system of measures to develop the rail industry in Russia and bring in foreign technologies in some areas. 
Eighth. Improve conditions for private businesses in those areas where there is no systemic risk from the reforms, but which can provide maximum impact, as discussed above. 
Ninth. Build new railway lines on the principles of public-private partnerships and start creating a network of high-speed dedicated lines. Solving these problems is a powerful anti-crisis measure, as evidenced by the experience of many countries.
Tenth. Consider an IPO of 20-25% of Russian Railways while maintaining absolute government control. The state would then receive funds for investment in new rail projects, while the preparations for an IPO would lead to greater transparency and the long-term sustainability of the Company’s business development. It would also attract private shareholders and investors. In addition, establishing a market price for Russian Railways shares on the stock exchange would create a very effective tool for public control and pressure on the management effectiveness. 
We believe that this approach to of reform is much more efficient for the government than the endless division and fragmentation of the industry and the expectation that pseudo-competition at the local levels of a unified system will be able to increase productivity and socio-economic efficiency in general. 

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    [PREVIEW_TEXT] => Rail reform has already been underway in Russia for more than ten years, but the debate about whether or not the industry actually needs reform has never ceased. Some believe that reform should be stopped during the economic crisis, while others believe that this is time to hand over the dominant role in passenger and freight transport to private business which, they maintain, is ready to solve all the problems and strategic challenges facing the industry.
    [~PREVIEW_TEXT] => Rail reform has already been underway in Russia for more than ten years, but the debate about whether or not the industry actually needs reform has never ceased. Some believe that reform should be stopped during the economic crisis, while others believe that this is time to hand over the dominant role in passenger and freight transport to private business which, they maintain, is ready to solve all the problems and strategic challenges facing the industry.
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