STUDIES OF ECONOMIES IN TRANSFORMATION Transport Strategies for the Russian Federation Jane Holt 9 THE WORLD BANK RECENT STUDIES OF ECONOMIES IN TRANSFORMATION PAPERS No. 1 Country Department III, Europe and Central Asia Region, Food and Agricultural Policy Reforms in the Former USSR: An Agenda for the Transition No. 2 Michalopoulos and Tarr, Trade and Payments Arrangements for States of the Former USSR No. 3 Country Department III, Europe and Central Asia Region, Statistical Handbook: States of the Former USSR No. 4 Barr, Income Transfers and the Social Safety Net in Russia No. 5 Country Department III, Europe and Central Asia Region, Foreign Direct Investment in the States of the Forner USSR No. 6 Wallich, Fiscal DecentraliZation: Intergovernmental Relations in Russia No. 7 Michalopoulos, Trade Issues in the New Independent States No. 8 The World Bank, Statistical Handbook 1993: States of the Former USSR STUDIES OF ECONOMIES IN TRANSFORMATION PAPER NUMBER 9 Transport Strategies for the Russian Federation Jane Holt The World Bank Washington, D.C. Copyright @ 1993 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 1993 Papers in the "Studies of Economies in Transformation" series present the results of policy analysis and research on the states of the former USSR. The papers have been prepared by World Bank staff and consultants and issued by the World Bank's Europe and Central Asia Country Department Ill. Funding for the effort has been provided in part by the Technical Cooperation Program of the World Bank for states of the former USSR. In light of the worldwide interest in the problems and prospects of these countries, dissemination of these findings is encouraged for discussion and comment. 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ISSN: 1014-997X Jane Holt is senior transport financial analyst in the Infrastructure/Energy/Environment Division of Country Department III, Europe and Central Asia Region of the World Bank. Library of Congress Cataloging-in-Publication Data Holt, Jane, 1945- Transport strategies for the Russian Federation / Jane Holt. p. cm. - (Studies of economies in transformation, ISSN 1014-997X : paper no. 9.) Includes bibliographical references. ISBN 0-8213-2625-2 1. Transportation-Russia (Federation) 2. Transportation-Russia (Federation)-Planning. I. Title. II. Series. HE255.2.H65 1993 388'.068-dc2O 93-32003 CIP Contents F orew ord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix A b stra t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Acknowledgm ents .................................................. xii Abbreviations andAcronyms .......................................... xiii Gl ossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Overview and Recommendations ......................................... 1 1 Economic and Financial Performance of Russia's Transport System ................ 23 2 Institutional Framework for Tnsport .................................. 51 3 R ail w ays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 4 Road T a spor ................................................. 87 5 Urban PassengerTrnspor ......................................... 101 6 H ighways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 7 W aterborne T an por ............................................. 121 8 Airlines and CiUAvidon .......................................... 157 9 Transport EquipmentManufacturng ................................... 181 iii Annex A Statistical Summary of Transport Demand Forecasts .................... 193 Annex B Compilation of Primary Transport-Dependent Industry Economic Forecasts for Railways and WaterborneTranspor ............................ 195 Annex C Derivation of Estimates of Physical Consumption of Energy in the Russian Transpor Sector ..................................... 209 Annex D Compilation of Privatization Acts in the Transport Sector of the Russian Fedemtion ......................................... 215 Annex E Russia's Principal Sea Carriers: Their Fleets and Trading Patterns in 1991 ..... 245 References ...................................................... 249 M APS: IBRD 24770R ............................................. 255 IBRD 24771R ............................................. 256 iv Exhibits TEXT 1.1 Russian Freight Transport Task, 1992 Estimates ........................... 24 1.2 Modal Shares of Soviet International Trade Tonnage, 1988 .................... 25 1.3 Transport Ton-Kilometer per Dollar of GDP (Road, Rail and Water) .............. 27 1.4 Volume of Russian FreightTransport ................................. 28 1.5 Domestic Freight Transport Demand and Its Relation to GNP Growth Rates ......... 29 1.6 Energy Transport Demand, 1980 to2015 ............................... 32 1.7 Non-Energy Transport Demand, 1980 to 2015 ............................ 32 1.8 Passenger Demand, 1980 to2007 .................................... 33 1.9 Russian Rail Passenger Projections ................................... 34 1.10 Russian Rail Freight Projections ..................................... 35 1.11 Actual and Forecast Volumes of Russian Freight Transport, 1991 to 1995 .......... 36 1.12 Actual and Forecast Russian Freight Transport Task ........................ 37 1.13 Rail Share of Combined Rail andTruck ............................... 38 1.14 Urban Passenger Transport Operational Losses ........................... 39 1.15 Financing Transport from the State Budget, 1992 .......................... 40 1.16 Transport Subsidies Compared to Total State Budgeted and Unbudgeted Subsidies, 1992 . . 41 1.17 Subsidies on Energy Consumption,1992................................ 42 1.18 Physical Energy Consumption by Transport Modes, 1992 ..................... 43 1.19 Transport Tariff Index Adjustments ................................... 45 2.1 Structure of Transport within the Russian Government ....................... 52 2.2 The M inistry of Transport ........................................ 54 3.1 Coverage and Performance of the Former USSR Regional Railways Compared to Other Major Railw ays, 1990 ............................................... 60 3.2 Soviet and Russian Railway Categories and Employment Levels ................. 61 V 3.3 Former USSR RailwayData ....................................... 63 3.4 Russian Railways: Indexed Traffic Trends, 1980 to 1992 ..................... 64 3.5 Percentages of Common Carrier Shipments by Type of Transportation ............. 65 3.6 Rail Freight Traffic Trends in Europe, 1988 to 1992 ........................ 66 3.7 Common Carrier RailTraffic ...................................... 67 3.8 Daily Wagon Loads in the CIS byRepublic ............................. 68 3.9 The Directorate of the CIS Railway Transport Council ....................... 70 3.10 Railway Equipment Production and Delivery Statistics ....................... 71 3.11 Number of Track Kilometers Subject to Speed Restrictions .................... 73 3.12 Track M aterial Deliveries ......................................... 74 3.13 Locomotive Replacement and Maintenance .............................. 74 3.14 Comparision of U.S. and FSU Railway Labor Productivity Levels ............... 75 4.1 Russian Trucking Fleet .......................................... 90 4.2 General Use Road Transport Vehicle Load Capacity, 1970 to 1991 ............... 92 4.3 Actual and Forecast Truck Capacity vs Transport Demand in the Russian For-Hire Trucking Industry, 1990 to l995 .................................... 93 6.1 Russian Federation RoadNetwork .................................. 108 6.2 Federal Road Conditions (two-lane equivalent) .......................... 110 6.3 Public Road Network Expenditures .................................. 112 6.4 Projected Funding for Public Roads to be Financed from Road Funds, January 1993 ... 113 7.1 Status of the Former Soviet Merchant Fleet, July 1, 1992 .................... 122 7.2 Merchant Fleets of theW orld ..................................... 123 7.3 Cargo Turnover in RussianSeaports ................................. 124 7.4 Russian Seatrade Volumes by Type of Cargo ........................... 125 7.5 Transportation Used by Russian Firms for Deliveries ....................... 126 7.6 Cargo Turnover in FSU Ports, 1990 and1991 ........................... 127 7.7 Tonnage Throughput of Russian Maritime Shipping Basins and Major Ports, 1991 .... 130 7.8 Cargo Handling Rates at Three Major CIS Ports .......................... 131 7.9 Characteristics of Key Russian Seaports and Proposed Investments, 1991 .......... 135 7.10 Typical Shipping Company and Port Operations Organizational Structures .......... 146 7.11 Merchant Fleet Age Distribution,1992 ................................ 147 7.12 Ships on Order in Russian Yards, January 1993 .......................... 147 7.13 Ships on Order by Russian Interests, January 1993 ........................ 148 7.14 Inland Water Transport Tonnage,1990................................ 151 8.1 W orld's M ajor Airlines,1990 ..................................... 158 8.2 Regional Aeroflot Administrative Departments circa 1990 .................... 159 vi 8.3 Aeroflot Profit and Loss, 1988 to l991 ............................... 161 8.4 Aeroflot Traffic Performance and Operational Results, 1991 (Domestic) ........... 162 8.5 Aeroflot Traffic Performance and Operational Results, 1991 (International) ......... 163 8.6 Inter-State Aviation Committee,1991................................. 166 8.7 Aeroflot - SovietAirlines ........................................ 167 8.8 Budget Request for Financing Federal (Interstate) Air Transportation ............. 169 8.9 Accident Rates (PassengerService) .................................. 170 8.10 New Airline Routes overRussia .................................... 171 8.11 Comparative Fuel Consumptions ................................... 172 9.1 Railway Asset Manufacturing Sources in FSU Countries ..................... 183 9.2 Russian Truck ProductionCapacity .................................. 185 ANNEXES A. 1 Energy Related Domestic Transport Demand, 1980 to 2015 ................... 193 A.2 Non-Energy Related Domestic Transport Demand, 1980 to 2015 ................ 193 A.3 Domestic Freight Transport Demand and Its Relation to GDP Growth Rates ........ 194 A.4 Non-Energy Freight Task byMode ................................. 194 B. 1 Characteristics of Economic Planning Regions ........................... 196 B.2 Economic Planning Regions of the Former USSR ......................... 197 B.3 World Coking Coal Trade, 1990 ................................... 199 B.4 USSR: Hard Coal Exports byDestination ............................. 200 B.5 M ajor Oil Refineries inRussia .................................... 201 B.6 M ajor Russian SteelPlants ....................................... 203 B.7 Composition of CIS Grain Consumption .............................. 204 B.8 Projected Grain Demand in Year2000 ............................... 204 B.9 Grain Imports to the CIS, 1990 .................................... 205 B. 10 Forest Products Trade,1988 ...................................... 207 C. 1 Estimated Aircraft FuelConsumption................................. 210 E. 1 Performance Indicators of Russia's Principal Sea Carriers .................... 245 vii Foreword Russia's transport system, developed for a an unsubsidized cost structure becomes clear, command economy, will require substantial careful analysis will be required to ensure that restructuring to meet the needs of a market proposed transport investments are justified on economy. The structure of the industrial and economic or social grounds. The downturn of the trahsport sectors, coupled with low energy prices, economy, along with the shift from transporting have led to a far more intensive use of transport in raw materials and industrial goods to transporting Russia than in other economies: almost six times lower-density general freight, will keep transport as high as the United States and four-and-one-half levels below their peak of 1988 for years. times as China. Furthermore, a shift from rail to road transport is Intensifying the need for basic restructuring are inevitable, particularly for time-sensitive shipments problems stemming from the present economic and short-haul traffic. situation and the breakup of the USSR. Lower This report on Russia's transport sector reviews output reduced the demand for many transport the issues and assesses alternatives for improving services; and the dissolution of the USSR has had the efficiency of transport operations and making a deleterious effect on the supply of vehicles and them more market-oriented. The report also spare parts for all modes of transport, particularly assesses the effect transport reforms and for the railway system. The sector's performance investments will have on economic recovery and is declining as a result and the government is of the fiscal impact that transport enterprises may increasingly called on to cover operating losses have on the government's budget. The study is and finance investments. intended for policymakers and their advisers in the The government recognizes the need to Russian Federation and other republics of the restructure the transport sector. It has begun former USSR. All those interested in transport, in privatizing many transport operations and has distribution systems, in fiscal reform issues, and in taken steps toward freeing prices. But the the critical role that privatized transport operators vertically integrated, centralized and monopolistic can play in facilitating economic recovery should structure of the sector has made achievement of find this study useful. reforms more difficult than anticipated. At the same time, the lack of knowledge of how much the coming economic rationalization of the energy and industrial sectors will require changes by the transport sector has led to pressure to return to the Russell J. Cheetharn old system. Director This means that until Russia's economy is Country Department III restructured and the true level of demand based on Europe and Central Asia Region ix Abstract This report assesses Russia's transportation sector and offers courses of action to arrest its decline and to manage its transition to a system more suited to a market-based economy. The study covers railways, road transport, urban passenger transport, highways, ports, maritime and river transport, airlines and civil aviation, and transport equipment manufacturing. It reports on the infrastructure assets, the institutional framework, and the operating and financial performance of each mode. The study also analyzes the economic role and fiscal impact of each mode on the national economy and assesses how that role may change in the future. On the basis of this analysis, a strategy for change is developed, along with recommendations for the Government of the Russian Federation to help the transport sector adapt to its new market role. xi Acknowledgments This report is based on background papers and Invaluable support, cooperation and basic data other chapter inputs prepared by a transport sector was provided by our Russian counterparts: Mr. team that visited Russia on a number of occasions Vitali Efimov, Minister of Transport, Mr. Jakov during 1992 and 1993. Jane E. M. Holt was the V. Serov, Chief of External Economic Relations leader of these missions and the principal author and many other transport officials within the of this report which was based on contributions Ministry of Transport and its modal operating from: Kirk Hagen and Werner Hauser (road departments; Mr. Gennadiy M. Fadeyev, Minister transport and truck manufacturing); Melody of Railways, and others within MPS; Mr. Piotr Mason and Cesar Querioz (highways); Hans Kushnaryov, Head of the Department for Peters (maritime, ports and river transport): Louis Financing Transport Systems, Ministry of Thompson and Julie Fraser (railways); Thomas Finance; and Mr. Rostislav Rutkovsky, Head of Till (institutional framework, road transport, and Complex, Ministry of Economy. The work also urban transport); Richard Podolske (urban benefited greatly from discussions with many transport); Jeff Procak (railways and equipment other Russian experts - too numerous to mention manufacturing). - who generously shared their insights. The report also relies in part upon economic Good advice, valuable comments and insightful forecasts, background data and investment suggestions were received from many. In analyses contained in consultant studies financed particular the study has benefited from the by the European Bank for Reconstruction and expertise of World Bank staff: Jonathan Brown, Development (EBRD). The report reflects the Marc Blanc, Costas Michalopoulos, Marcelo experience of the International Financing Selowsky, Yukon Huang; peer reviewers Michel Corporation (IFC) with respect to privatizing Ray, Agustin Litvak, Simon Thomas and the late trucking in Nizhniy Novgorod. Insights regarding Philip Blackshaw; and other transport colleagues energy demand were provided by Charles Jean Marie Lantran, Gilbert Caroff, Eugene McPherson, Doug McKay and David Craig; fiscal Vernigora, Anthony Pellegrini, Alfredo Soto and data and macro-economic linkages regarding Zmarak Shalizi. Outside review was provided by implicit energy subsidies were provided by modal experts within the US DOT, as coordinated Philippe Le Houerou, Paulo Vieira da Cunha and by its Office of International Transportation and Elana Gold. Bert Schacknies of the U.S. Trade. Assistance with graphics and other Department of Transportation, Federal Highway research support was provided by Jeff Procak and Administration, provided insights on the highway Julie Fraser. Karin Skeldon formatted and desktop sector. published the report. xii Abbreviations and Acronyms AAR Association of American Railroads EBRD European Bank for Reconstruction ask available seat kilometers and Development ASMAP International Road Transport EC European Community Association EMU electric multiple unit ATC air traffic control ERR economic rate of return AvtoUAZ Ulianovsk Motor Vehicle Plant FAA Federal Aviation Adminstration BAM Baikal-Amur Railway (U.S. Government) BOT build-operate-transfer FOB free-on-board bvk billion vehicle kilometers FHD Federal Highway Department FSU former Soviet Union CBR Central Bank of Russia CEE Central and Eastern Europe GAZ Gorki [Nizhni Novgorod] Motor cgt compensated gross ton Vehicle Plant CIF Cost-Insurance-Freight GDP gross domestic product CMEA Council for Mutual Economic GDR German Democratic Republic Assistance GKI State Committee for the CIS Commonwealth of Independent Management of State Property States GNP gross national product CPE centrally planned economies GOSTROI State Planning and Construction CSD CzechoSlovak Railways Committee CSFR Czech and Slovak Federal Gudok MPS newspaper Republic HDM III Highway Design & Maintenance DB German Federal Railways Model DM deutsche mark DMU diesel multiple unit IBRD International Bank for DR German State Railways (former Reconstruction and Development GDR) ICAO International Civil Aviation DRSU uprdor maintenance units Organization DSC Directed State Credits ICB international competitive bidding DSU uprdor construction units IFC International Finance Corporation dwt dead weight tonnage IRI international roughness index xiii ISO International Standards PPF Project Preparation Facility Organization PTRC Public Transport Research Council RF Russian Federation KamAZ Kamsk Large-Truck Production RoRo Roll-on-Roll-off Association RSFSR Russian Soviet Federated Socialist Republic LCB local competitive bidding LiAZ Likinsk Bus Plant SNCF French National Railway Company SOE statement of expense MAK Interstate Aviation Committee SPA Scientific Production Association MAV Hungarian State Railways SZD Soviet Railways MAZ Belarusian Large-Truck Production Association TA technical assistance MINPROM Ministry of Industry TEU twenty foot equivalent unit MIS Management Information Systems tkm ton kilometer MOE Ministry of Economy TU traffic unit MOF Ministry of Finance MOP Ministry of Planning UGAT Central Regional Administrations MOT Ministry of Transportation of Civil Aviation MPS Ministry of Railways UIC Union Internationale des Chemins NPO Scientific Production Association de fer NPV net present value UNCTAD United Nations Conference on Trade and Development OBO oil bulk carrier UralAZ Ural Motor Vehicle Plant OECD Organization for Economic USSR Union of Soviet Socialist Cooperation and Development Republics pass-km passenger kilometer VOC vehicle operating costs PCA Production and Commercial vpd vehicles per day Association PKP Polish State Railways ZIL Likhachev Motor Vehicle Plant xiv Glossary Agroprom agriculture industry amalgamation avtodor oblast-level road administration responsible for federal highway network road maintenance cabotage domestic port-to-port cargo transport demurrage downtime, or cost of time lost while loading and unloading beyond the scheduled time of departure krai administrative region Mosavtodor Moscow oblast state highway agency oblast region, a Soviet (now Russian) territorial-administrative unit okrug administrative district Rosagroprom Russian successor to the all-Union Agroprom Rosavtodor all-Russian autonomous state entity responsible for road construction and maintenance Rosavtotrans the organization overseeing all for-hire Russian truck transport Sovtransavto former all-Union international truck transport monopoly tare weight of a wagon when empty Union USSR uprdor highway-specific administration responsible for maintenance and rehabilitation of the specific highway to which they are assigned xv Overview and Recommendations Developed for the command economy of the * To avoid funding unnecessary investments former Soviet Union (FSU), Russia's transport and investments aimed at modernizing sectors that system is ill-suited to the needs of a market cannot be supported by the beneficiaries. economy, and the people who run it are not 0 To raise fuel prices to world market prices prepared for the massive transformations as soon as possible, so that the implicit subsidy necessary to meet those needs. At the same time, now given to transport does not further distort the Russia's economic difficulties and the breakup of industrial sector and emerging consumer the FSU have undermined the ability of the system industries. to operate. The financial performance of the Despite progress in privatizing some transport transport system is declining as a result of the operations, there is evidence that the system widening gap between revenues and costs that continues to try to operate under old rules and to stem from declining demand, rising fuel prices, reimpose them where market forces are starting to inflationary pressures on wages, and inevitable break them down; it should be adapting to today's demands to delay and limit tariffs. To fill the gap, economic circumstances and tomorrow's market government funds are increasingly being requested challenges. For example, the government's decree to cover losses and to finance investments that can in December 1992 concerning operational no longer be funded from operating revenues. planning for rail movements of freight for export Unless government takes action to help the could easily lead to the reimposition of centrally transport sector adjust to a market economy, the controlled and inflexible operating practices. This fiscal and economic burden of increasingly would be counterproductive to the inevitable massive operating losses and expensive and changes in the size and nature of demand that will unproductive investments will become prohibitive. be placed on the system as reforms take hold in Russia's economy. Over time, these changes will To address the fiscal burden, stronger efforts cause a significant shift in market share from rail are needed: to road transport. Reliability, speed, and * To adhere to the government's objectives to predictable service will become more important to privatize and eliminate monopolies in the transport customers than movement of large volumes at low system. cost in response to pre-determined plans. Such * To leave the supply and pricing of transport changes are difficult to believe for Russian services to the marketplace wherever possible. transport operators and government officials * To restructure parts of the system where a unfamiliar with the nature of customer demands in natural competitive framework will not easily market-based economies. Indeed, many transport evolve after privatization and elimination of officials believe that demand will return to old monopolies. levels and transport modes in a year or so and 1 Overview and Recommendations they continue to call for government to make the areas. Ways exist to keep urban transport losses to same sorts of commitments as in the past. a minimum. On the whole, this reform is best accomplished by privatizing as many transport Even if transport demand returned to old levels, functions as possible and letting the marketplace the historic production focus of Russian transport bring expenses and revenues into line. This is true enterprises would undermine the ability of even for urban transport where subsidies may still railways and other transport modes to provide the be required but where a combination of quality of service required by a market economy. privatization, competition and attention to In the past, freight transport operators focused performance criteria can help keep them to a primarily on producing services to support orders minimum. In some cases, remedying the basic placed months in advance by state-owned organizational, structural, and managerial enterprises. Not having to compete for traffic, problems of transport enterprises and government transport operators paid limited attention to agencies may require strategies designed providing their customers reliable, efficient specifically for the entity involved. Substantial delivery of services with little loss and damage. restructuring is particularly needed in the railway Shipping goods belonging to state enterprises did and port sectors to help them adapt to changing not demand a sense of accountability for good market conditions and become more responsive to service. The command economy's predominant private sector users. orientation toward production was inconsistent with the reliability, flexibility, economy, and A new regulatory and legal framework is attention to reducing loss and damage expected by needed. In accomplishing these changes, the service-oriented transport systems that serve government will concern itself less with carrying market economies. out transport operations and more with designing rules under which privatized operators will work. Understanding that changes in the economic Russia thus needs to think in new ways about its framework will fundamentally change the nature transport problems and to develop a new legal and and size of demands on the transport system is regulatory structure for acting on them. The legal essential to counteract inappropriate allocation of framework should encompass a set of basic resources, such as fuel; the proposal of principles, policies, laws, and regulations - unnecessary and costly investment projects at the perhaps codified in a basic transport act. As the expense of more urgent ones; and declining government has recognized, the structure should performance of the transport sector. Substantial, put as much of the sector's assets and operations rapid adjustment is necessary to ensure that as possible in a deregulated, competitively transport will respond to the needs of a market- structured private sector, in which determination based economy. Without greater efforts to reform of prices and investment is left to the marketplace. and restructure it, Russia's transport system may The government's role would then be limited to not be capable of responding to newly emerging one of setting policies to ensure that the market private sector users and could slow economic place works, that transport operations are development. undertaken safely, and that services are available In the case of macroeconomic policies affecting to users on an equal basis. fiscal subsidies - directed credits and lack of controls on the finances of state-owned enterprises Only where a monopoly or oligopoly exists - the measures needed are identical to those being would regulations regarding price and applied in other sectors throughout the economy. performance be brought to bear. This role is far The government should not be concerned that different from the hands-on planning and directing such measures are too harsh for sectors like of transport investments and operations that transport. Given the volumes of business involved, governmental transport institutions played in the there is no reason for ports, airlines, railways or past. It may be difficult to change old habits and road transport to lose money carrying freight or let the market place function, but this change is of passengers over long distances, except to remote vital importance. 2 Overview and Recommendations To gain insight, Russia should review the financial support to performance improvement and experience of transport systems that have proved cost recovery measures. To the extent they are effective in market-based economies and to the related to social purposes - such as support to the lessons learned by other countries that have northern regions - transport services should be improved their transport sectors: for example, provided under competitive bids as soon as trucking deregulation in Australia and the United practicable. In all cases involving subsidies, States; railway deregulation and restructuring in efforts should be made to isolate the revenues and the United States'; urban bus transport costs of the service into a separate corporation or deregulation in the United Kingdom; and the cost accounting unit, so that the subsidies are privatization of ports in Chile, United Kingdom, transparent and the real nature of the issue is and elsewhere. Transport systems that were once better understood. For example, it is advisable to highly regulated now work far more effectively isolate and treat suburban and commuter railway after being freed of regulation of price or market passenger services as separate units by location. entry. Overall, deregulation of railroads, trucking, and air cargo in the United States collectively Transport's share of the federal investment reduced freight transportation logistics costs from budget in 1992 represented 12 percent of the total 14.7 percent of GNP in 1981 to 11.7 percent in state investment budget, excluding defense. The 1986, saving about US$65 billion a year. bulk of the investment budget was for railways This report contains recommendations as to how (Rb22 billion), aviation (Rbl 7.8 billion), and road government can help the transport sector adapt to transport (Rbl7.4) billion. To curb the growing these changes; a summary of these fiscal impact of transport, it is important that recommendations is contained in the matrix transport projects financed by the government are following this overview. Where possible, sound and of the highest priority. Given current suggested strategies have been grouped into those macroeconomic conditions, special care will be that should take place in the near term, the needed to guard against superficially attractive medium term and the longer term. investments in new infrastructure and equipment. Such investments may have been justifiable under Fiscal Policy the old rules but may not cover their operating and capital costs in the new economy. Generally The fiscal burden of transport is large and speaking, investments should be devoted to growing; explicit subsidies for operating losses essential reconstruction, maintenance, and training represented 11 percent of Russia's total budgeted projects rather than to expansion or subsidy payments in 1992, and were roughly modernization. Increased transport capacity is not equivalent to 2 percent of GDP. The financial needed in Russia; what is needed is to preserve performance of transport entities is declining. The existing capacity. Unfortunately, in many cases single greatest federal fiscal problem in transport investments aimed at modernization that require is urban transport deficits, but the explosive foreign currency are also dubious because their growth of deficits on suburban commuter railways rates of return are low and their costs cannot be and airline subsidies are enormous problems as recovered. The government has already approved well. To reduce the fiscal deficit, the government investments by railways and airlines, including will need to reduce transport entities' reliance on purchase of rolling stock, continued expansion of the federal budget and impose greater financial new rail lines, extension of electrification, discipline on state owned enterprises. No subsidies purchase of replacement aircraft, and development or directed Central Bank of Russia (CBR) credits of airports. Most of these investments are being should be provided to enterprises to be privatized. approved without assessing their costs and To the extent that such subsidies are related to the benefits: government's intention to soften the impact of * Although considerable evidence exists that price liberalization - such as fuel subsidies for the physical condition of essential railway airlines, tariff and fuel subsidies for urban infrastructure is declining, the Ministry of transport - it would be prudent to link such Railways' (MPS) investment plans focus on 3 Overview and Recommendations passenger reservation systems, foreign-made transport, capacity is not expected to be a problem passenger cars, and high-speed rail systems. for the next 4 to 5 years. Government and (World Bank analysis of a new high speed rail line transport managers need a better understanding of between Moscow and St. Petersburg indicates when and why they are losing money. Transport that, even given a ridership level of 12 million accounting systems are currently a major obstacle passengers, a one-way fare of US$123.00 would to correcting structural and operational be needed to break-even on total costs, assuming inadequacies. Enterprises cannot be restructured, construction costs of US$7.4 billion and a 50 costs cannot be isolated and analyzed, and percent operating ratio.) Investments in passenger investment cannot be rationalized without properly service may have political merit but should structured operational and financial information. include the means to improve cost recovery; otherwise they will widen the gap between costs Low Fuel Prices Add to the Fiscal Burden. and revenues. Transport's share of the implicit energy * The government is considering investing in consumption subsidy is enormous and represents a costly air traffic control system (US$10 billion), an even larger fiscal burden. Subsidized provision while the predicted drop in demand and slow of energy is by far the largest subsidy in Russia. recovery of air traffic would seem to argue for Its opportunity cost, measured at the market ensuring that the system is not over-designed and exchange rate, exceeds the gross domestic product that its costs are recoverable from user fees. (GDP). The subsidy is largely implicit, resulting Ideally, the entire investment should be structured from the large discrepancy between domestic not to rely on government money to subsidize the prices and the value of energy at world market investment. prices. Based on estimates of physical volumes of * The Ministry of Transportation's (MOT) energy consumed and the GDP equivalent of 1993-95 budget requests Rb7.1 billion and US$1.2 implied energy subsidies throughout the economy, billion toward the repowering of 1,500 jet aircraft transport's share of the government's implicit by 2007. Because each engine costs US$10-12 subsidy of oil energy consumption is equivalent to million, the project would cost US$18 billion. 13 percent of GDP. Similar analysis shows that Such an investment is probably unwarranted, transport's share of the implicit subsidy of given the age of the aircraft and the current electricity consumption - largely by railways, worldwide glut of aircraft. The Ministry of metros, and trams - is equivalent to 6 percent of Finance (MOF) has not included this ambitious GDP.' Reducing subsidies and rationalizing the program in the 1993 federal investment budget, energy sector are essential to stabilizing and but a program of directed state credits for such a restructuring of Russia's entire economy and, if purpose is under discussion. implemented, will help reduce the fiscal burden of * Parliament has approved a Program for the the transport sector. Raising energy prices to Renovation of the Merchant Marine which calls world levels will thus stimulate reform of the for the acquisition of 7.7 million deadweight tons transport sector and encourage larger oil exports, (dwt) of new ships, roughly half of the current adding revenues necessary for a sustainable fiscal fleet. It is anticipated that financing will be adjustment. provided from a newly established fund consisting of hard currency earnings of the maritime fleet. Role of Transport in the Economy Given the slow growth expected for Russia's international trade, however, a maritime support Implicit subsidization of energy consumption is program may not be the best use of such hard one of the underlying reasons why the use of currency revenues. transport in the Russian economy is far greater than in other industrial economies. Russia's Existing transport assets should be used more transport system was geared to move huge efficiently, and new investments avoided unless volumes of bulk commodities among centralized required by economic restructuring. In every production facilities over long distances according element of Russia's transport system except urban to centralized and fairly rigid annual plans at 4 Overview and Recommendations prices that did not reflect the real economic cost service essential to success. Eliminating of energy. As a result, the level of transport uneconomic, obsolete, and environmentally intensity and cost to the economy is far higher harmful industrial plants and reducing transport than in most industrialized countries. movements by the defense sector will contribute to Transportation of goods was valued at 9.1 percent this change. Over time, these trends will reduce of GDP in 1990 compared to 6.3 percent in the the rail share significantly and accelerate the United States'. The difference is even more growth of road transport. In international trade, dramatic if one compares the transport ton- developments in the maritime sector are expected kilometers (tkm) per dollar equivalent of GDP. to follow broader economic development trends, According to World Bank analysis, transport ton and it might take 12 years for Russia's waterborne kilometers per unit of output in the FSU in the transport system to achieve seatrade volumes late 1980s was almost six times that of the United characteristic of the mid-1980s. States and four-and-one-half times that of China'. A shift of rail traffic to road is also inevitable, Much of the excess use of transport is by rail, particularly for time-sensitive shipments and for which carries on a tkm basis 96 percent of land short-haul rail traffic. Far more rail traffic is freight transport (excluding pipeline shipments), carried over relatively short distances in Russia compared to 50 percent in the United States and than elsewhere in the world. More than 17 percent 30 percent in western Europe. Russia's excessive of all Russian rail tonnage is carried less than 100 use of transport is not so much a function of its km. As a market economy develops and shippers vast distances as it is of the fact that organization become free to choose modes of transport, short of industrial sectors was usually not based on haul rail traffic will be highly vulnerable to minimizing costs of transport and total logistics. competition from trucking which offers door-to- door service, more flexibility, and greater Intensive use of transport will affect the reliability. These trends will reduce the share and competitiveness of Russia's industries and exports composition of rail traffic and accelerate the in the future when input, output and fuel prices inevitable growth of road traffic. Depending on reach world levels and transport tar ifs reflect true the rates of overall economic growth, the economic costs. Once privatized and put on a percentage of non-energy freight carried by road competitive basis, Russia's industrial sector will transport will shift from its current 13 percent to seek to minimize transport costs and may not be between 22 and 41 percent by 2015. able to support the same long distance transport flows of bulk commodities as in the past. For Budget allocations and investment plans should example, it is uncertain whether coal from not be based on the assumption that traffic levels centrally located fields is commercially exportable will rebound. Government forecasts indicate that to either Europe or the Far East if real production transport levels will recover quickly, without and transportation costs are taken into account. much shift from rail to road. As a consequence, transport planners argue for continued investments The precipitous fall of more than 35 percent in and budgetary support almost on a business-as- freight transport traffic since 1988 reflects the usual basis. Based on experience elsewhere, such drop in overall economic activity in Russia and forecasts are too optimistic; a decline in transport presages a changing economic role. As reforms and a shift in modes is inevitable as government take hold, market forces will make the economy policies move away from a command to a mixed less transport intensive and will dramatically economy. In the course of restructuring their affect the nature and mix of commodities carried economies, for example, Central and East as well. Much of the excessive freight in basic European (CEE) countries experienced a drastic commodities will simply cease. Russia's industrial drop in rail demand. Lack of understanding that sector will seek to minimize the flow of bulk changes in the economic framework will inevitably commodities, while newly created consumer- shift transport modal shares is becoming a serious oriented businesses will turn to road transport for issue, as it is causing modal administrators to the flexible and responsive door-to-door transport develop policies and investment programs 5 Overview and Recommendations according to historical practices rather than to would allocate such resources to passenger service needs ofthe future. The result will inevitably delay when fare levels are so far below the costs of reforms and lead to the inappropriate allocation of providing the service. Little benefit to the federal resources to the transport sector. economy accrues from such an investment, since passenger trains are already full and service is Railways subsidized, while urgently needed railway equipment, such as track maintenance machines, Railways are challenged by the inevitable switch remains unfunded. that a market system will bring in freight transport demand from rail to road. Consultants forecast The railways' present structure impedes their that demand for railway services will not recover ability to operate in a competitive, commercial, to 1989 levels until well into the next century, and customer-oriented framework. Undue while the Ministry of Railroads (MPS) forecasts a centralization by MPS and inappropriate regional sharp upturn in the near to mid term. Officials at decentralization have produced a rail monopoly the Ministry of Economy (MOE) also believe that that is difficult to control politically and when the current economic turbulence is stilled, unresponsive to shipper's quality and service railways will regain high traffic levels and a large needs. At the same time, regional railways operate freight market share. as a fragmented set of individual, entities, each Experience from around the world in similar focusing on local traffic. They have no incentive situations suggests that significant traffic will to provide adequate service to traffic that remain but routes and service needs will be quite originates or terminates off-line because they different. For example, shifts in locations and cannot control the service provided by others and quantities of coal production will significantly may not profit from their efforts. It has proven alter freight routes and volumes. The combination difficult, for example, to get the regional railways of falling demand, rising costs and reluctance to to respond consistently to an MPS commitment raise passenger tariffs is causing the traditionally for Trans-Siberian container trains to be run non- profitable railway system to incur skyrocketing stop coast to coast. This demonstrates how deficits. By late 1992, that deficit was at an difficult it may be to increase containerized freight annualized level of Rb75 billion, and for the first movements in the near to medium term. time in years the government found it necessary to subsidize rail transport. These losses are evidence Dissolution of the FSU has had an extremely that fundamental reform is necessary and that the deleterious effect on the formerly all-union railway railways need to become more commercially system. The breakup has hurt rail operations as oriented, lower their costs, organize their services well as in such critical managerial functions as more appropriately, and develop corresponding rate setting, revenue division and carriage investment plans. Instead, MPS has hired management. Traffic levels and patterns have been additional workers and its capital plans still focus disrupted, new borders have delayed transit times, on constructing employee housing, expanding the and inter-railway interchanges have increased network, continuing electrification, and even to dramatically as an enormous amount of traffic that promoting a high speed rail line with no chance of was formerly single-line traffic must now cross financial viability. two or more systems, each with its inevitable Other investments concentrate on improving delay and processing time. The railway has also passenger service at the very time losses are been deeply affected by disruptions in equipment increasing. The railways' request for foreign supplies. Disintegration has led to the allocation of exchange credits to purchase a US$200 million rolling stock and containers among republics, and computerized passenger reservation system, in arguments have developed over how to divide particular, could be questioned, given the current revenues and charge demurrage. Other republics fiscal situation. While such a system may make increasingly complain about sending rolling stock sense in the future, less costly systems are into the "black hole" of Russia. Given so many available and one questions why the railways uncertainties over the future form of railway 6 Overview and Reconnendations management structures, there are no immediate intra-rail competition by combining and then prospects for resolution. redividing regional railways so there is direct competition among them. Except for some areas Overstaffing and ancillary activities contribute of the country, this restructuring would enable the to operating deficits and provide scope for government to limit regulation of railway prices improved productivity. The Russian railway and service levels to a large extent. While there is system employs 2.24 million people. About 1.6 no single or simple approach to creating intra-rail million are engaged in railway operations; nearly competition, it is possible, for example, to (a) 500,000 in schools, hospitals and restaurants; and structure parallel-line competition from Lake another 200,000 in industrial activities. These Baikal to Moscow and the western borders; (b) ancillary activities eventually should be privatized make the Eastern Siberia, TransBaikal and Far or separated operationally and financially East railways into bridge carriers jointly owned by wherever possible. World Bank analysis shows competing carriers west of Lake Baikal, ultimately that labor productivity on the Russian railways is yielding intrarail competition over the entire route somewhat less half of U.S. railways, which are from Europe to Asia; and, (c) grant the Moscow comparable in size and traffic levels to the railway trackage rights of the October Railway to Russian system. While it would probably be St. Petersburg and the Finnish border to create uneconomic for Russia to attain equivalent competition in this vital market. (These are only productivity figures it should certainly be possible examples: a great deal of study is needed before for MPS to operate its freight service with at least any decision is made about restructuring freight 20 percent - roughly 200,000 - fewer employees. activities.) Russia's railway system needs restructuring to Problems afflicting every mode of Russia's become financially viable and customer oriented transport system make it difficult to achieve the for the future market economy. Russia's problems integration and cooperation needed to stimulate will not solve themselves. The government needs growth of an effective container system. One to initiate a restructuring effort or otherwise risk: factor affecting the economy and distribution of * Further erosion in rail transport service, Russia's international transport is the low level of with its attendant higher cost. containerization. A report undertaken for the * Possible predatory behavior on the part of European Bank for Reconstruction and the railway as it attempts to defend its market Development (EBRD) estimates that position. containerization in transport is approximately one- * Continued large, unsustainable deficits fifth of the average level prevailing in which pose a serious macroeconomic challenge for international trade.' Efforts to impose an the overall economy. intermodal system on top of the current disorganization of the transport system are not To restructure the railway system, the likely to succeed, and the lack of a healthy and government's strategy should begin with two growing container-based transport system for both broad efforts: international and domestic trade will present * Separate the intercity (long-term) and physical and economic barriers to the growth of suburban passenger (near-term) services from Russia's international commerce. freight, provide them with clear and direct sources of performance-based public subsidies where Trucking essential, and end their cross-subsidy by freight revenues. The immediate establishment of a competitive and * Corporatize and commercialize the privatized trucking industry is essential to environment in which rail freight services are overcoming Russia's otherwise rigid and offered and operated. unresponsive transport and logistics system. Slow In the longer term, the government may action in this key policy reform will hinder the consider restructuring the railway system to create rapid and effective transition to a market-based 7 Overview and Recommendations economy and act as a brake on economic growth. enterprises that specify obsolete rates Privatizing and eliminating monopolies in the for- inappropriate to a free market should also be hire trucking industry are moving slowly, abolished. MOT officials indicate that such although most enterprises have submitted contracts may affect as much as 80 percent of for- applications to privatize. There is some evidence hire traffic. These contracts should be replaced by that the government is reluctant to press forward new, freely negotiated contracts that recognize full with eliminating trucking monopolies and assuring cost levels, account for demand and carrier that no firms are given geographic or commodity performance, and provide adjustments for specific monopolies. Except in small rural areas, inflation. the government should require that bus and truck operations are privatized into separate firms, since Highways the two are essentially incompatible on an operational and financial basis. To make the The expected growth in road transport traffic will industry more competitive and ensure that barriers put heavy demands on the road system. The share to entry are minimized, the government should of road traffic for non-energy transport could offer incentives allowing enterprises to auction off approach 41 percent in twenty years, compared to portions of their fleets to private individuals as the present level of 13 percent. If just 10 percent part of the privatization process. This will foster of the tkm now carried by rail is diverted to the the entry of new trucking firms, since new foreign intercity trucking industry, the level of truck and domestic trucks cost too much for most new traffic on Russia's roads will double, causing businesses. New entrants should also be created more than twice the road wear since an estimated by privatizing vehicles owned by Agroprom and 20 to 30 percent of trucks are more heavily loaded by permitting these and trucks owned by industrial than the 6.5-ton per axle load for which most firms to compete with those in the for-hire Russian roads are designed. In terms of wear and industry so as to ensure enough through capacity tear on the vehicle fleet, estimates of the economic for new business entrepreneurs. Government cost of not taking immediate measures to improve should also act to improve the environment for road and highway conditions on the 1,350 private, independent trucking firms by ensuring kilometers of the highest priority roads in the first that auxiliary services such as fuel, servicing, and year of deferred maintenance could amount to maintenance are available to all road users. US$250 million, with exponential increases in the Competition should also be fostered by ending following three years. existing geographic and commodity-based monopolies, by eliminating control over empty Deterioration of the highway network, from a movements, and by eliminating tariff restrictions. growing backlog of deferred maintenance, could result in a complete pavement failure if not Continued government influence over trucking corrected soon. Reduced funding for maintenance rates and contracts threatens trucking reform. One has meant poor quality of construction and very serious problem impeding the development of rehabilitation, inadequate maintenance, and poor a market-responsive trucking industry is quality of bituminous material used in road government regulation of rates. Recent reports construction. At least 38 percent of the trunk road conflict about whether or not trucking rates are system requires rehabilitation or reconstruction; still regulated and, if so, at what level of another 25 percent is in fair condition and requires government. Rate regulation should be removed at thick overlays. The total cost of restoring these all levels to ensure rapid development and roads to good condition could amount to US$4.5 efficient growth of a competitive trucking billion (at world prices). If roads are not industry. There are some indications that oblast strengthened soon, there is a high risk of complete governments are moving toward regulation of pavement failure, which would increase rates in a manner that would restrict the free restoration costs by at least 50 percent. An equally movement of goods among and within oblasts. serious situation exists with the 60,000 bridges on The old haulage contracts for government the federal road network, more than a third of 8 Overview and Recommendations which are in poor condition. The problem of of the transit fleet, while instituting reforms that deferred maintenance is important in its own right will make the enterprises more operationally and but particularly important given the expected financially productive. Russia's urban public growth in road traffic as shippers choose to move transport has historically had 70 percent of its high-value freight from rail to road. costs covered by subsidies. The 85 percent of the population using the system should improve cost Without reforms and additional financing, the recovery by paying fares that support a higher highway sector will not be able to respond to the percentage of the costs. In many areas, completely challenge of preventing the collapse of Russia's self-supporting private transit services, perhaps road infrastructure. The government has created using microbuses or other non-standard vehicles, a number of "concerns" or companies to replace could be established. the construction and maintenance organizations previously in MOT, but lack of funding may Maritime prevent the concerns from evolving into a sustainable, privatized, domestic contracting The effective implementation of the government's industry. excellent policy of Maritime Reform and Port Privatization has broken the monopoly between The need to preserve the highway network is so ports and ocean carriers, dramatically reduced critical that the government should consider governmentfiscal liabilityfor maritime operations, externalfinancing to implement road rehabilitation and set the stage for an effective program of projects that cannot wait until a road funding restructuring and privatization of shipping lines mechanism is satisfactorily implemented. Such and national ports. In January 1991, Russia's financing could be organized to help improve the seaports were organizationally separated from quality of road rehabilitation works by attracting national carriers as a first step toward experienced international firms to collaborate with restructuring the maritime and port sectors. This Russian contractors to undertake civil works major policy decision was an essential prologue to contracts. In this way, privatization of road the application of the basic policy objectives that construction concerns could be achieved and a must be achieved if Russia's ports are to be sustainable domestic road contracting industry effectively restructured: launched. Such financing is vital to Russia's economic recovery and is in the process of * Private participation, which is essential to working with the government to implement such the creation of effective competition. a project. * Maximum freedom from regulatory restraints, without which ports and carriers cannot Urban Public Transport respond effectively to the marketplace. * Decentralization, which not only prevents Urban public transport is essential to the economy the central government from exercising and vital to the mobility of the population, but bureaucratic authority over economic decisions, there is simply not enough money to operate or but also prevents dominant political groups within maintain the urban public transport system as carriers and ports from forcing non-economic presently structured. Public transport entities are agendas into business operations. experiencing a general decline in financial * An anti-monopoly policy, which ensures that conditions caused by low fares, rapid increases in economic competition exists and prevents the costs, increasingly limited subsidies from local transfer of a public sector monopoly to private governments, and high levels of passenger fare interests. evasion. These financial straits lead to under- * A public sector agency with the specific investment in, and deferred maintenance of, aging mandate to preserve market freedom through equipment. The government's strategy should deregulation and anti-monopoly powers. concentrate on finding practicable and affordable * Financial responsibility by eliminating solutions to stem the rapid physical deterioration access to subsidies. 9 Overview and Recommendations Restructuring Ports. Separating shipping lines channels - and lease them on a long term basis to from ports enabled MOT to develop a plan for private operators. To accelerate the restructuring, rationalizing and restructuring the port system. it is recommended that the government not finance Through this process, Russia's ten largest and any port investments nor give sovereign most diversified ports, which handle most of the guarantees on loans to port authorities or international seatrade, were designated on enterprises in the absence of a financially viable September 30, 1992, as being of national plan for a competitive restructuring of the port. importance and classified as category I ports to be The strategy should also develop a "port privatized. Another 21 ports, most of which are in authority" mechanism to be landlord for state- the Far East, were considered of regional owned assets, to represent the public role in the importance and classified as category II. Ten national ports system, and to ensure that the small ports were classified as category III. The contract operators of ports facilities meet their government is planning to transfer all ports in financial obligations and provide good service to categories II and III to regional or local the world's maritime industry. To this end, the jurisdiction. government's port privatization process, as modified by directives of November 1992 and The need exists for a national port strategy. The early 1993, provides for the establishment of a restructuring and privatization of national ports maritime port administration to serve as the public should be done in as competitive a manner as steward of each national port. The port authority's possible to enhance competition among them. To board would be the agent for the creation of the achieve this goal, Russia needs a national ports port's privatization plan. In assisting with this strategy that serves as a blueprint for an restructuring, any framework for analysis or institutional framework to manage port physical strategy developed by the government for dealing assets, and for a regulatory framework within with its national ports should not promote which the public's interest in preserving the continued control by central authorities of day-to- physical assets and obtaining efficient port day matters ofport operations and administration. operations can and should be protected. The Nonetheless, the government will have to be strategy should work within the decree on port involved in organizing the institutional framework privatization from the Ministry of Transport for managing the ports' physical assets, for (MOT) and the Committee for Management of developing a regulatory framework within which State Property (GKI). This decree calls for these ports will operate, and for maintaining - retaining real estate and infrastructure ownership through the port authorities - an appropriate in the state providing for private operations - permanent public role in the ownership and use of including labor and management participation in vital national port infrastructure. ownership of the operating companies - within a planned, competitively-structured framework. Proposed National Port Development Program, There are pressures for the government to based on a strategy ofself-sufficiency, is extremely modify this directive and permit privatization of costly and should be weighed against economic ports under option 2, by which 51 percent of the considerations. While accepting the inevitable stock could be owned by labor and management, decline in annual seatrade through the mid 1990s, with state ownership limited to 20 percent. the government's National Ports Development Whichever option is selected, port privatization Plan calls for building new ports to boost the should take into account a principle that is annual cargo handling capacity of the system from paramount and that is reflected in the 165 million tons to 240 million tons by the year government's privatization law, as modified by 2000. This would fully replace port capacity lost decrees issued in September 1992, November to the Baltics and Ukraine, and would expand port 1992, and January 1993: the government should capacity in the Far East in line with expectations retain ownership of the strategic physical of future trade growth with Pacific Rim countries. infrastructure and port real estate - including The entire program is expected to cost about breakwaters, quay walls, and navigable approach US$3.6 billion (1991 prices) over the next ten 10 Overview and Recommendations years, to be carried out in three phases. The business. All direct state subsidies were economic rationale for self-sufficiency, however, terminated, except those to lines serving remote is questionable, even if currently prevailing facilities in the Arctic and the Far East. The political imponderables are taken into account. shipping lines are in the process of being * Present and projected traffic levels are so privatized. Once privatized, it is important for the much lower than before the break-up that many of government to phase out the worldwide provision the efforts to replace "lost" general port capacity of bunker fuel to Russian merchant ships at may be unnecessary. Grain imports have dropped subsidized prices in local currency. Otherwise significantly due to good harvests and pricing these companies will be able to earn foreign reforms, and are expected to be 14 million tons in currency while paying virtually all their operating 1993, compared to about 25 million tons in 1992. costs in subsidized rubles. * Because current levels of utilization in the remaining ports are estimated at only about 60 Proposals to buy new merchant ships should be percent and productivity in terms of cargo resisted. The government has recently issued a handling is quite low, much of the lost capacity decree to acquire or build additional merchant can be recovered by making Russian ports as marine ships to replace those lost to other efficient as those in market economies. republics following the break-up of the USSR. * Although replacing selected specialized The government should resist financing such facilities in other FSU countries may be proposals because the worldwide glut of merchant rationalized for reasons of national security, the shipping capacity makes purchase of new vessels costs and benefits of making the investment in much more expensive than purchasing merchant Russia should be carefully evaluated and marine services on the international market. compared with opportunities for joint ventures or Government subsidy for the acquisition of new special contracts with ports in neighboring ships is also inappropriate, given the announced republics, at rates beneficial to both countries. policy of merchant marine privatization. * If new port facilities are built in Russia, a private, competitive freight forwarding industry Airlines might choose not to use them, since it is possible that the cheapest option will be to use existing The structure of the aviation system is in question; ports in neighboring republics or to ship by land airline losses are mounting and becoming an to European ports.' This is particularly so because increasing drain on the federal budget. The the investment in ports already built can be demand for air travel has fallen substantially and viewed as a "sunk cost", and port tariffs need is likely to fall even further as more subsidies are only cover long-range operating costs. If new removed. While lessening the pressure on the ports are built, rates will have to cover the full carrying capacity the aviation system, decreased investment as well as long range operating costs demand has exacerbated financial problems and unless the government is prepared to subsidize the made more urgent the need for the government to entire effort. devise and implement an effective aviation * The costs of adding new port facilities must strategy that will: also compete with (a) the need to protect and * Continue to pursue its initial policy of preserve existing breakwaters and quay walls in separating the basic elements of the aviation ports which are apparently in some jeopardy due system - airports, airlines, and the air traffic to lack of maintenance in the past, and (b) the control system - and making them operationally need to resolve land-side constraints and introduce and financially independent to the greatest possible intermediate storage to remedy operational extent. difficulties. * Resist pressures to subsidize airline losses and gradually end fuel subsidies. Fuel subsidies should be eliminated. In January * Identify the appropriate role and level of 1991 the shipping lines were corporatized and government involvement in each element of the permitted to compete with one another for system, whether it is ownership - federal control 11 Overview and Recommendations of the air traffic control system or local example, the average annual vehicle utilization in government control of airports - or regulation - common carrier trucking fleets is on the order of federal control of system operations, safety, and 52,000 km, while privately owned vehicles would fares in situations where there is no competition. average at least 80,000 km annually. If the * Redesign the structure of the airline industry available truck fleet averaged 80,000 kilometers a and facilitate privatization through a graduated year as a result of the industry's being fully process. privatized and deregulated, the gain in capacity * Ensure that federal support for new aircraft, would be equivalent to the purchase of more than retrofitting existing aircraft, airport construction 56,000 trucks based on projected demand level and expansion, and other major capital projects is and fleet size for 1995. In the event of shortage, repaid by the newly privatized companies for surplus industry and military trucks can be used. whom such investments are being made. Another example is the extremely low utilization There is no single right answer to structuring of rates of cargo handling equipment in Russian the airline industry. An effective solution would ports, which undoubtedly would improve with be to encourage all airlines that want to become privatization and offset the need for costly new self-sufficient (there were 174 in June 1993) port capacity. That lack of capacity will not be a compete in all markets, then allow mergers and problem is fortuitous, since major, permanent consolidations to take place as the market dictates. changes in the transport system's role are coming. The government should ensure that more than one airline is formed and that competition among Russian transport vehicles and equipment are airlines is encouraged and facilitated. technologically obsolete, fuel-inefficient, and Restructuring the airline sector should be generally inadequate to the market served. undertaken with the understanding that capacity Russian manufacturing processes need modern issues - numbers of airports and aircraft - will technology to cope with increasingly demanding be far less an issue than rationalizing facilities requirements. When the economy rebounds, and enterprises. Such rationalization should be transport operators will need to produce more guided by the marketplace, with government transport service with less - but better - transport investment and subsidy kept to a minimum. equipment. Fuel efficiency is a major concern in Airports should be supported by concessions for this regard, since current transport fleets lag shops and parking, and by landing fees; airlines significantly behind the rest of the world and should be supported by passenger and freight inefficient trucks will drive up the cost of revenues. transport intolerably once fuel costs reach world market levels. For example, if Russian diesel General locomotives are brought to world levels, Russia could save up to one billion gallons in fuel, or Transport capacity is not likely to be an issue for US$1.0 billion assuming a price of US$1 per transport entities in Russia for years. Transport gallon. demand is so low that it can be met with existing Russia's diesel truck engines are also infrastructure and equipment, even though much technologically obsolete and inadequate for the of it is in poor repair, out of service from lack of country's needs. The fire at the Kamaz factory in spare parts, not suited to its intended use, or in Tartarstan provides an opportunity to deal need of modernization. Except for railways, much effectively with this problem. Improving the diesel of Russia's transport equipment and infrastructure engines in Russia's trucks could cut their fuel is dramatically under-utilized by world standards. consumption by as much as 30 percent. At world Achieving greater levels of productivity with oil prices, this is a significant opportunity cost in existing equipment is easily possible despite its lost foreign exchange. Present domestic transport age, provided it is operated in a competitive equipment technologies are simply not capable of private sector environment; doing so is equivalent meeting these demands. The strategy for meeting to purchasing additional capacity at no cost. For these needs depends, in the mid to long-term, on 12 Overview and Recommendations an effective process for integrating critical industry is the quickest and most effective way to elements of foreign technology into Russia's create the demand that will cause manufacturers to domestic manufacturing processes. Foreign firms produce the small and very large trucks that are in entering the Russian market should be able to take shortest supply in Russia. Only when trucking a long-term view and be capable of withstanding operators and other enterprises that buy and losses in the early stages of their ventures. operate their own trucks demand significant numbers of these types of trucks will Russia's transport equipment is unsuitable for manufacturers begin to produce them. When the marketplace. Russia's truck fleet lacks small trucking operates in a private, deregulated and and very large trucks. In the World Bank's view, competitive framework, truck purchasers will be restructuring the truck and engine manufacturers much more likely to have the capital to buy such and privatizing and deregulating the trucking trucks. 13 Overview and Recommendations Recommended Strategies Matrix Railways Near term (1 year or less) * Preserve key parts of the existing rail network that are jeopardized by inadequate maintenance and the disruption in the supply of spare parts and equipment because of the breakup of the FSU and by the railway's increasing financial difficulties. * Take steps to limit operating losses and strengthen financial performance of the railways, to reduce the railway sector's fiscal impact on the national budget. * Take immediate measures to curtail suburban passenger losses. * Allow freight rates to rise to cover cost increases from inflation. * Reverse investment priorities to meet urgent needs by (a) deferring or eliminating projects with low rates of return, and (b) ensuring that projects related to improving rail operations under a command economy will have a commercial application in a market-based economy. * Heighten awareness of the changing nature of transport demand and the consequent need to develop long-range views of the railway's role in a market-driven economy. Medium term (1 to 3 years) * Start adapting the structure of the railway to the needs of the emerging transport markets in Russia. * Establish a labor redundancy program to ameliorate the effect of anticipated unemployment. * Review the structure and function of intercity rail passenger services to determine if they should be maintained as part of an integrated rail enterprise or established as a separate operating and financial entity. * Improve the quality of equipment maintenance. * Lay the groundwork for developing a competitive, private sector industry for repowering and overhauling diesel locomotives. * Privatize ancillary activities and separate them operationally and financially. * Devolve the operating and financial responsibility for suburban rail commuter services to municipalities. * Devise a plan and an administration for the smooth introduction and operation of modern wagon and container tracking system. * Assess and address environmental problems. Long term (more than 3 years) * Introduce a modern wagon tracking system. * Upgrade telecommunications. * Contract out routine maintenance activities. * Implement changes needed to create intra-rail freight competition, where appropriate, and to regulate railway market power where competition is not sufficient to govern prices and service levels. 14 Overview and Recommendations Recommended Strategies Matrix Road Transport Near term (1 year or less) * Complete privatization of road transport enterprises under a modified directive that encourages auctioning a substantial portion of the fleet as rapidly as possible. * Improve competitive structure by permitting easy entry of new trucking operators: Agroprom, other own-account truckers, freight forwarders, etc. * Remove or eliminate any geographic or commodity-specific monopolies or other restrictions on effective and efficient operations. * Maintain present policy against federal rate regulation. * Privatize and de-monopolize auxiliary services. * End any MOT or other government-sponsored program of subsidized financial assistance, including leasing, for acquiring trucks. * To support development of a private trucking industry, the government should lease surplus military or other facilities that can be used as terminals or warehouses. Medium term (1 to 3 years) * Formalize and expand the program of de-monopolizing the provision of auxiliary services by offering concessions to operate facilities for fuel, spare parts, maintenance, food and lodging along major intercity highways. * Develop or adapt training manuals and computer software for Russian trucking firms to aid them in such areas as maintenance, operations planning, bookkeeping and marketing. * Coordinate and implement night-time driving safety measures. * Reform the allocation of international trucking operating certificates now handled through a non- governmental body, ASMAP. * Develop a body of vehicle licensing and operating specifications that will not impair the most economical and efficient use of the existing truck fleet or raise the cost of new trucks to uneconomic levels. * Stop providing terminal and warehouse facilities either through privatization of facilities provided under the stop-gap program or cancellation of existing leases. Long term (more than 3 years) * Develop an appropriate set of safety and environmental standards for trucks. 15 Overview and Recommendations Recommended Strategies Matrix Urban Public Transport Near term (1 year or less) * Implement emergency measures to maintain service levels. * Formulate a short-term strategy for keeping the existing urban transport fleet operating. * Develop new specifications for buses suitable to the Russian climatic, service, and operating environment. * Define and reach consensus on the basic elements of a reform package for the provision, financing, and management of urban public transport. Medium term (1 to 3 years) * Ensure that the preconditions for effective manufacturing of new urban transport equipment in Russia are in place. * Implement the reform package to improve the financial and operating performance of urban public transport. * Refine specifications for improved urban transport equipment. Long term (more than 3 years) * Privatize intercity buses. * Complete devolution of transit to municipal or local level. * Promote manufacturing of improved urban transport vehicles through licensing and joint ventures. * End parastatal operations; maximize private provision of urban transport services through contracts with private corporations. 16 Overview and Recommendations Recommended Strategies Matrix Roads and Highways Near term (1 year or less) * Preserve existing road network. * Ensure adequate funding for road rehabilitation and maintenance. * Obtain external financing for road rehabilitation. * Give priority to road maintenance rather than road construction. * Improve the quality of road maintenance works. * Develop an economic road maintenance strategy. * Review the administrative structure of the highway subsector. * Strengthen the capacity of FHD. * Determine the role of avtodors. * Establish a competitive road contracting industry. * Introduce competitive bidding for road works. * Introduce a contract management and supervision system. * Establish a traffic count system. Medium term (1 to 3 years) * Improve highway subsector planning and evaluation of projects. * Design and implement a bridge rehabilitation program. * Review the classification and maintenance of non-public roads. * Review and revise road design standards. * Monitor axle loads on roads built to six ton standards. * Enhance training of highway subsector staff. * Design and implement a road safety program. Long term (more than 3 years) * Clear federal road maintenance backlog. * Increase road capacity. * Develop axle load regulations. * Contract out routine maintenance activities. 17 Overview and Recommendations Recommended Strategies Matrix Waterborne Transporr: Port Sector Near term (1 year or less) * Preserve critical operating capabilities in Russian ports. * Take measures to reduce the dependency of port operations on the availability of rail cars at quayside for unloading and loading of ships. * Make plans to restructure road and rail access facilities to critical port installations and assess investment costs for these improvements. * Take measures to ensure self-sufficiency of national ports and to eliminate the government's centralized fixing of port tariffs wherever there is effective competition. * Permit ports to refuse service to non-paying customers and to auction unclaimed cargo to clear backlogs. * Reaffirm port privatization policies and launch assistance efforts to help ports implement them, including provision for maritime port authorities to own port infrastructure (such as quays, breakwaters and navigational channels) remaining in state ownership. * Reassess the national port investment plan and limit any government support of port investments to those justified with cost/benefit analyses and to those undertaken in the context of port specific corporatization, privatization, or restructuring plans with loan agreements structured appropriately between port and government. * Establish policies for devolving responsibility for the planning, construction and financing of ports to local authorities. Medium term (1 to 3 years) * Enhance MOT's capacity to undertake economic and environmental assessments of proposed port investments. * Begin implementing port privatization plans as developed and approved by ports, GKI, MOT, and newly created Port Authorities. * Assist MOT to revise the legal and regulatory framework in the port sector in conjunction with privatization plans. * Assist ports in restructuring and privatizing ancillary activities. * Assist ports in establishing a safety net for managing staff redundancies. Long term (more than 3 years) * Complete the restructuring of the port sector and continue to lay groundwork for development of a competitive private sector. * Introduce competitive bidding for the provision of maritime and port service to low density northern zones. 18 Overview and Recommendations Recommended Strategies Matrix Waterborne Transport: Maritime and River Shipping Lines Near term (1 year or less) * Corporatize, cut managerial links with government and put all maritime and river carriers on a commercial footing. * Permit carriers - in appropriate situations - to diversify into related services such as freight forwarding, trucking, and warehousing. Medium term (1 to 3 years) * Deregulate river and maritime transport: abolish tariff regulation except in cases of monopoly or where subsidies are necessary; ease entry and exit restrictions. * Let the marketplace allocate maritime capacity. Foster development of transport competition by promoting competition among the several river shipping lines, the several maritime shipping lines, and Russian and nearby foreign ports. 19 Overview and Recommendations Recommended Strategies Matrix Civil Aviation Near term (1 year or less) * Continue efforts to reduce the airline sector's negative fiscal impact. * Ensure that the government fully compensates airlines for provision of services to the state for governmental business or social purposes. * Encourage airlines to restrict extensions of credit for airline service to state enterprises. * Take steps to upgrade the clearinghouse for inter-airline settlements, so that it can offer prompt and accurate payments in accordance with clear and agreed accounting practices and standards and ensure that the clearinghouse agency is independently owned and operated. * The government should reduce and terminate where possible programs that finance investments, including building new airports, acquisition or re-engining of aircraft, or introducing an air reservation system for privatized airline companies. * Develop within MOT the capability to analyze the financial and operational performance of Russia's domestic and international airlines and the ATC system; develop appropriate policies for the structure and operation of a private, competitive, financially self-sustaining aviation system. * In the context of privatizing airports, ensure that each airport offers its services on an equal basis to all carriers. * Ensure that newly privatized airline operations are permitted to compete with each other in the same markets and, as time goes by, to merge and rationalize themselves as market forces dictate. * In privatizing or corporatizing Aeroflot enterprises involved in international aviation, dissolve the Production and Commercial Association and privatize its individual entities in a way that breaks the ownership linkages of airline and airport and enhances competition. * Prepare a strategy for how to divide Aeroflot's international operations and international assets among CIS countries that wish to have their own international airline. * Restructure and federalize activities of MAK that are appropriate governmental functions. * Privatize airport construction companies and ensure that any airport construction is contracted through competitive bidding. * Assess safety performance of the airline and aviation system and develop near-term action program to alleviate critical deficiencies. Medium term (1 to 3 years) * Continue restructuring the airline sector. * Complete the separation of the ATC system from Aeroflot and structure an appropriate system of charges to finance the upgrading of its operation and improvement. * Establish capability within MOT to promulgate operational and maintenance standards for the airline and aviation system. * Establish an independent agency to investigate air accidents and incidents and to recommend to government appropriate remedial actions. * Establish policies for devolving responsibility for planning, construction and financing airports to local authorities in a manner that assures that any federal financing of airports is based on user charges and made available on the basis of equitable apportionment principles. * Introduce competitive bidding for the provision of airline service to low density northern zones. 20 Overview and Recommendations Notes Trucking Trends (1991-92 edition), gross freight revenues in the trucking industry in the U.S. 1. Looking at the rail mode in particular, U.S. totalled US$272 billion in 1990, representing 78 experience demonstrates that making the railway percent of the nation's freight bill and 4.9 percent more directly responsive to market needs brings of GDP. Accordingly, total transport expenses dramatic change. U.S. railway labor productivity amounted to US$349 billion and represented 6.3 trends, which had roughly paralleled those of the percent of GDP. Comparisons are difficult to FSU, improved much more quickly than in the make because of the heavy distortions in prices USSR after the deregulation and restructuring of throughout the economy compared to the United bankrupt railways. In fact, improvement was so States. powerful that railway profits and investment are at their highest levels, even though average freight 4. Sources: (a) World Bank Development Report revenue per tkm has actually fallen (in constant as 1991, Table 30; (b) L.W. International Financial well as current dollars) every year since 1982. Research, Inc., [Bulgaria, Czechoslovakia]; (c) Similar pressures and trends would be felt in The Economist, January 12, 1991, p 65 (FSU). Russia if the appropriate competitive and regulatory regimes can be implemented. 5. Booz * Allen & Hamilton/Travers Morgan. EBRD Railway Sector Survey of the Railways of 2. Calculations of the levels of implicit energy Russia, Ukraine, Belarus, and Kazakhstan, subsidies are clearly very sensitive to the London: July 1992, p 20. exchange rate used in the analysis. The magnitude of energy subsidies was also calculated using a 6. The government should leave these decisions simulated exchange rate of Rb91/US$1 proposed to the marketplace, a development made possible by the Research Institute on Prices of the Russian by its laudable decision to privatize freight Ministry of Economy. Using this exchange rate, forwarding. Exports may generate more foreign transport's share of the government's implicit currency for Russia if, for example, enterprises subsidy of oil energy consumption was equivalent were to ship products by land to ports in Europe, to 11 percent, and its share of the government's where there are more international carriers implicit subsidy to electricity was 2.5 percent. available to carry goods worldwide more quickly and cheaply than to insist that all Russian goods be shipped in Russian ships through Russian ports. 3. Russian Economic Reform, Crossing the It would be unfortunate if government's recent Threshold of Structural Change, A World Bank drive to re-centralize control of exports were to Country Study, August 1992. Table 2-3: Gross undercut the development of what can, and Domestic Product by Industrial Origin at Current should, be a thriving and competitive private Prices, 1989-90. According to ATA's American industry. 21 1 Economic and Financial Performance of Russia's Transport System Geographic and Economic Setting approximately 20 percent.' The government has reasserted its intention to press forward with The Russian Federation, with a land area of 17.1 reforms but is now moving more slowly than million square kilometers, is by far the largest expected on privatization and enterprise reform country in the world, stretching across 11 time efforts. It has acceded to pressures to extend zones. The country is characterized by three credit to financially distressed state enterprises in distinct geoclimatic regions: the steppe, the taiga, an effort to postpone unemployment. The and the tundra. The steppe, a band of territory consolidated fiscal deficit at the end of 1992 was west of the Ural mountains with most of Russia's estimated to be in excess of GDP despite measures arable land, is where the bulk of agriculture and to reduce government expenditures and subsidies industry is located, and where 78 percent of the and to introduce new value-added and excise people live. The taiga, a thickly forested zone, taxes. The economic situation will be difficult for and the tundra in the extreme north, cover 67 some time; the most optimistic prognoses for 1993 percent of Russia; most of the country's energy indicate that industrial output will continue to fall reserves and other natural resources are located in by 7 to 10 percent. The general economic decline, these regions. Russia is divided into 88 compounded by shifts in production, and rapid administrative-territorial divisions: autonomous inflation, are having an immense effect on the republics with their own parliaments; krais, which transport sector in terms of demand and supply of have considerable autonomy; oblasts or states; and essential spare parts and replacement vehicles. other administrative districts. Russia has embarked upon a program of Sector Background economic reform with a view toward creating a market economy that can become increasingly Russia's internal surface transport system includes integrated into the world economy. The process of a vast network of railways, roads, pipelines, and transition from a command economy to a market- inland waterways, much of which is west of the based one has been initiated under difficult Urals. Extensive rail and pipeline networks also economic circumstances, with the added serve the main industrial areas in Siberia and complication that the society is also trying to extend across the southern third of the country to establish new philosophical, political and the eastern coast over permafrost and through administrative structures. The result of these other harsh climatic conditions. Because much of changes in 1991 was a decline in output of 9 its population is urbanized and private ownership percent, with inflation of 142 percent in retail of cars has been discouraged, Russia has one of prices and 236 percent in wholesale prices.' the world's largest public transport fleets. Despite Despite some efforts to liberalize prices and its enormous land mass and extensive coastlines, stabilize the economy, it is estimated that Russia now has relatively few maritime ports, the industrial output for 1992 as a whole fell by result of geographic, demographic, and climatic 23 Chapter 1 Exhibit 1.1 Russian Freight Transport Task, 1992 Estiiates (billions of tkm) Mode 1970 1980 1985 1986 1987 1988 1989 1990 1991 1992 All Traffic 2,o45 4.456 4.748 5.002 5.053 5,117 5,014 4,794 4.388 4,236 including General Purpose 2.523 4,232 4,502 4.746 4.791 4,844 4.731 4,509 4,104 3,800 Railway 1.706 2,362 2.554 2.632 2.631 2,659 2,611 2,526 2,362 2,250 including General Purpose 1.672 2,316 2,506 2.585 2.581 2,606 2,557 2,479 2,319 2,150 Road 116 241 265 275 277 287 295 300 290 263 including General Purpose* 32 67 71 70 70 71 71 68 64 59 including Roavtotrans** 29 63 67 66 66 67 62 58 55 51 including Own Account 84 174 194 205 207 216 224 232 235 204 River 168 232 248 241 240 237 226 220 200 183 including General Purpose 164 228 243 237 235 233 221 214 195 181 Sea 412 534 503 520 524 539 531 508 470 470 Pipelines 243 1.087 1.179 1.334 1.381 1,395 1.351 1,240 1,057 1,070 *Inciudes international,intracity,intercity **Without Mosavtotrana and St. Petersburgavtotrans. As f 1993. "RosavtotranC" will be a Russianjoint stock trucking companv Russian Freight Transport Task, 1985 to 1992 General Purpose Cargo billions of tkm . . . MU NIIE is HiE 5,000 -9*. is... Si: jl' .... ..BU . : n HUi55::5l: .ilinumffi Offi..- 4,500 - mu000 au r sr . . s.... juu irn .ss gm 2,s NEI-fif 2:ii 1ii-:: .. 3 N.0 1.5 2,000 1,500 1,000- 191 1992 lå Tgck u River ..Sea P pehne Ra . .I. All Mode1 SOURCE: Ministry of Transport, RF, 4 November 1992 24 Chapter 1 conditions and the loss of more than half its port haul for road transport are much greater - over capacity to other republics following the break-up 500 km in the United States. A well-developed of the USSR. The break-up has also seriously pipeline system transports more than 1 trillion tkm disrupted the railways and airlines. of petroleum products annually, representing about 25 percent of total freight. Freight Transport. Given the long distances within the country, and the number of bulk Passenger Transport. Passenger transport in shippers with annual production plans serving as Russia is supplied primarily by public enterprises, a basis for pre-planning movements, long and with rail providing the largest share of intercity medium distance freight transport relied primarily and suburban transport and a variety of buses, on the railway, and to a far lesser extent on inland trams, trolleys, and metros providing urban waterways (exhibit 1.1). Road transport was used transport. Overall, passenger travel in Russia is primarily for short trips as a feeder to the railway dominated by short-distance bus travel. Russia is and for distribution of goods within urban areas. a highly urbanized country, with 70 to 75 percent As a result, the railway system is the most of the population living in cities. Its urban public intensively operated in the world, carrying about transport fleet, the third largest in the world 90 percent of surface transport in terms of tkm, behind China and India, is estimated to carry 90 excluding pipelines. percent of all urban motorized person-trips, perhaps the highest level among nations with Although the average length of haul for rail similar levels of income. In large measure, this freight is over 900 kilometers (km), almost 17 situation reflects the fact that private car percent was over distances of less than 100 km, ownership is only about six cars per 100 while the average length of haul for road transport inhabitants, compared to over 40 in Western is surprisingly low, less than 30 km. By contrast, Europe. the share of rail freight in the United States is about 40 percent and in Western Europe well Russia is also highly dependent upon air service below 10 percent, while the average lengths of because of its vast distances and a governmental policy of maintaining low air fares. Owner of more than 8,000 aircraft, the world's Exhibit 1.2 Modal Shares of Soviet International largest fleet, Aeroflot carried nearly 133 Trade Tonnage, 1988 million domestic passengers in 1990 Modal Total compared to about 500 million in the U.S. Total Share of Percent and 1.1 billion in the world in 1991. Foreign Total without Mode Import Export Trade (percent) Pipelines Transport's Role in International Trade. volume in millions of tons Before its dissolution, the USSR's annual international trade was about 500 million Railway 25.6 78.7 104.3 20.0 26.5 tons and the ratio of imports to exports was Maritime 82.5 193.7 276.2 52.9 70.2 roughly 1 to 4. The bulk of the trade was River 1.6 9.9 11.5 2.2 2.9 by waterborne transport. Excluding pipeline deliveries of oil and gas, maritime and Automotive 0.5 1.0 1.5 0.3 0.4 river-sea transport accounted for more than Pipeline 1.2 127.5 128.7 24.6 - 70 percent of the international trade Total 111.4 410.8 522.2 100.0 100.0 tonnage hauled (exhibit 1.2). Nonetheless, Russia's seatrade represented only 4 Source: Nikolai N. Kazanskiy, ed., The Economic Geography of percent of global seatrade. The freight Transporr (Moscow: Transport, 1991), p 143. volumes associated with foreign trade transactions represented less than 5 percent of all cargo movements within the FSU. 25 Chapter 1 Transport Network and Traffic Levels handling capacity for several types of cargo in Russian ports. Eleven of the FSU's 17 national Russia's present basic transportation infrastructure ocean carriers are under the Russian flag, includes railways, highways and road transport, representing 57.4 percent (13.6 million ports and maritime shipping, river transport, and deadweight tons [dwt] carrying capacity) of the airlines. former Soviet merchant fleet. The national carriers accommodate only half of Russia's Railways. Nearly 86,000 km of railway line is seatrade, much of which is done with tonnage operated by 19 regionally autonomous railway chartered from foreign shipowners. administrations. Until the breakup of the USSR, 17 of these were organized as a single unified River Transport. The bulk of the FSU river railway system with 15 other railways in the other transport system came under Russian jurisdiction, republics. After the dissolution, two more Russian including 100,000 km of navigable river sections regional railways were created in Kaliningrad and and man-made canals, as well as 9,000 cargo and Sakhalin. The rail system in the FSU is the most passenger vessels, 11 key ports, and hundreds of intensely used rail system in the world, carrying riverine cargo transfer facilities. About 570 3.9 billion tons (3.7 trillion tkm) and 4.2 billion million tons of cargo were transported within this passengers (417 billion pass-km) in 1990. Of this system in 1990, including 17 million tons of total, Russian railways carried 2.1 billion tons international traffic with special river-sea vessels. (2.5 trillion tkm) and 3.1 billion passengers (273 The largest portion of the domestic cargo was billion pass-km). In addition to the principal rail construction material. Roughly 75 percent of all system, there are some 151,000 km industrial river transport takes place within three major river railway lines in the FSU belonging to independent basins west of the Urals. There are 29 principal enterprises. river transport companies which are registered under the Russian flag. Highways and Road Transport. The public highway network contains 250,000 km of paved Airlines. Air transport in Russia is provided by road; road density is slightly above the average Aeroflot, which until the breakup of the USSR, for middle-income economies. Traffic levels on was a vertically integrated state enterprise the highway network are relatively light since responsible for airline service and for operation road transport was organized more as a feeder and development of airports and air traffic service to railways than as a competing mode and control. Russia has 6 international, 130 national, passenger car ownership is low. Total road freight and approximately 3,000 local or regional transport is provided by Russia's roughly three airports. Before the breakup, Aeroflot reportedly million trucks, of which about 1,500,000 belong owned more than 8,000 aircraft, of which 104 to state farms and other agricultural entities under were used in international service. In 1990 it Agroprom and about 700,000 to common carrier carried 133 million passengers throughout the trucking companies. Soviet Union. In 1991, Aeroflot carried 82 million domestic passengers, a drop of about 5 percent, Ports and Maritime Shipping Industry. The and 13.8 billion tkm of domestic and international Russian Federation has 41 seaports serving freight. Domestic passenger traffic in Russia fell international and cabotage trades. Seven are major to 62.6 million in 1992. Internationally, Aeroflot maritime ports: one on the Baltic Sea, one on the carried about 4.4 million passengers in 1990 and Black Sea, one in the Arctic, and four on the 3.7 million in 1991. eastern coast. Only 63 percent (164 million tons) of Russia's seatrade was channeled through Past Performance and Future Prospects domestic ports in 1990; most of the balance was handled by ports in the Baltic Republics and Russia's transport system is critical to the Russian Ukraine. Many specialized port facilities are in economy, with freight transport representing 9.1 other FSU republics, so there is now a shortage of percent of GDP in 1990, far higher than in most 26 Chapter I industrialized countries.' In the United States, the dollar value of Exhibit 1.3 Transport Ton-Kilometer per Dollar of GDP (Road, freight transport represented 6.3 Rail, and Water) percent of GDP in 1990." The difference is even more dramatic comparing the transport tkm per F dollar of GDP for a number of Fsu (22,272) -.qg countries with the FSU as a whole. Poland (305) ,0g CSFR (126) .82 According to World Bank figures, China (9,597) 676 transport tkm per U.S. dollar Canada (2,305) 74 equivalent of GDP in the FSU in the late 1980s was almost six times Buloaria (111) 72 that of the United States and four usA 9,167) o.e4 and a half times that of China' Hungary (92) 0 8 (exhibit 1.3). The fact that Russia India (2.973) 0.51 and the other FSU republics relied Yugoslavia (266) 0.46 on transport to a greater extent than apain (499) o.ar other countries is not a function of Holland (34) 0.34 distance, as one might assume, but of the way its industrial and social Sweden (412) 0.32 sectors are organized. Industrial Belgium (30) 0.82 production is often concentrated in w. Germany (244) 0.28 a few number of huge complexes UK (242) 0.26 and their location was sometimes Italy (294) o.2a based more on social factors than on France (546) 0.22 economic consideration, such as minimizing transport costs. As a Austrla (es) 0.21 result, the proportion of bulk products shipped is unusually high, 1988 tkm per $ of 1988 GDP freight transport is more intense, ( ) = Area in thousand square kilometers and there is an extraordinary dependence upon rail transport GDP is based on the purchasing power of currencies factor as presented compared to other countries. in Table 30 of the World Bank's World Development Report 1993. Source of non FSU rail data: What Determines Demand for Freight Unrealistic costing and high levels Transport?, Bennathan, Fraser and Thompson. IBRD PRE Working of bulk rail shipments causes rail Paper 998, October 1992, p 11. transport to be underpriced and leads shippers to ignore the real value of service quality in logistics costs. over time. Comparisons with other countries show that transport demand is also related to the Relationship of Transport Demand to Gross structure of a country's economy. A study of the National Product (GNP). In general, growth in historic relationship of Russian freight transport transport levels is closely related to GNP, demand to GNP shows that transport demand has although changes in transport demand often grown rather faster than the general economic anticipate changes in GNP. This relationship holds growth.' Further analysis, however, demonstrates broadly true for Russia, where total freight that a major growth component was associated transport has declined sharply since 1988, as has with energy, particularly with expansion of the the Russian economy as a whole (exhibits 1. 1 and pipeline system. Total transport grew at an 1.4). It would be a mistake, however, to assume average annual rate of 4.0 percent between 1970- that transport's relation to GNP does not shift 1990 (exhibit 1.4). Of this total, however, energy 27 Chapter 1 Exhibit 1.4 Volume of Russian Freight Transport (millions of tons) Est Modefype/Organization 1970 1980 1985 1986 1987 1988 1989 1990 1991 1992 All Traffic 14,719 22.967 24,131 25.372 25.867 26,003 25,849 25,130 23,601 21,250 including General Purpose 4,429 6,446 6.123 6.532 6.705 6,807 6,663 6,367 5,855 4,375 Railway 6.089 8,150 8,713 8.924 8,981 9,082 8,865 8,497 7,745 7,350 including General Purpose 1,648 2,048 2,165 2.236 2,228 2,261 2,205 2,140 1,956 1,825 Road 7,853 13,597 14,137 15.124 15,528 15,546 15,629 15,347 14,688 13,250 including General Purpose* 2,004 3.178 2,677 2.972 3.119 3,171 3,103 2,941 2,731 2,550 including Rosavtotrans** 1,848 2,946 2,458 2,748 2.889 2,950 2,675 2,584 2,396 2,350 including Own Account 5,849 10.419 11.460 12.152 12.409 12,375 12,526 12,406 11,957 10,700 River 388 538 592 604 624 638 639 613 564 515 including General Purpose 77 57 55 55 56 56 58 51 50 47 Sea 85 104 Ill 120 124 126 119 112 103 103 Pipelines 303 576 575 597 607 608 594 558 499 505 Air 1 2 3 3 3 3 3 3 2 2 *Includes international,intracity,intercity *Excludes Mosavtotrans and St. Petersburgavtotrans. As of 1993. "Rosavtotrans" will be a Russian joint stock trucking company. Volume of Russian Freight Transport, 1985 to 1992 million tons 30,000 25,000 20,000 15,000 10,000 5,000 .All Traffic 1985 196Pipelines 1987 River 1988 1989 Sea 1990 , Air 1991 1992 SOURCE: Ministry of Transport, RF, 4 November 1992 28 Chapter 1 related transport grew by 5.8 percent a year, Economic forecasts are difficult in any while non-energy related transport grew by only circumstance, but the failure of the government to 2.4 percent; growth in the first decade was far implement macroeconomic policies that might greater than in the second. In the 1970s, energy stem the decline in output and near-hyperinflation related transport grew primarily because of creates greater uncertainty than normal. Further increased oil production, which is more transport uncertainty stems from the undetermined pattern intensive than coal. In the 1980s there was an of inter-republic trade flows, the rate of economic absolute decline in the production of coal and oil, recovery, and the degree of structural change but a marked increase in the output and average within the economy once economic recovery length of haul of gas. Over the most recent begins. decade, therefore, non-energy related freight Structural change and a move to a market transport grew more slowly than GNP (exhibit economy may eliminate uneconomic, obsolete, 1.5). and ecologically harmful industrial plants. A move from state-owned industrial giants to smaller Future Transport Demand. In looking to the consumer-oriented firms is likely to alter transport future, there is a need to assess the range of patterns significantly. The defense sector is also in economic growth likely to occur in Russia, decline and may never recover to previous levels changes in the structural nature of the economy of GNP. These changes will reduce the transport and the mix of output, and the consequent impact intensity of Russia's economy, but Russia's size, of both on the demand for transport. Freight scale and poor access to sea transport make it transport demand in the FSU will generally follow unlikely that the relationship of transport demand economic growth patterns and will continue to to GNP will decline enough to match that of other reflect overall economic developments for large countries such as Canada or the United domestic inland traffic and international flows. States. Exhibit 1.5 Domestic Freight Transport Demand and Its Relation to GNP Growth Rates 3.5% Annual growth rate In percent 3%- 2.5%- 2% - 1.5% 0.5% 0% 1970 1975 1980 1985 1990 Year Freight Task & GNP Energy-related E non-Energy-related E GNP Source. IBRD graph of data from EBRD Rail Sector Survey Report, p. 20 29 Chapter 1 Despite such difficulties, consultants financed by corresponding increase in medium-distance hauls. EBRD to assess the FSU railway sector used a In a privatized, deregulated, market-oriented combination of U.S. and Canadian input-output environment, road transport increasingly will tables to derive relationships of transport to 18 become the mode of choice for shippers of high sectors. They applied these relationships to value or time-sensitive commodities, since road PlanEcon's forecasts of Russia's economy to transport offers faster and more flexible service prepare low, median and high growth scenarios.' than railways. Although road transport may cost Their forecasts examined energy related transport more than rail transport in terms of tariffs, the demand separately from non-energy related price is usually less than the production time lost demand, in part because the two most important or extra inventory carrying cost associated with sectors in the CIS are agriculture and energy. slower railway service. Road transport is now Annex A provides detailed statistical projections. competitive on a cost basis alone for distances up Annex B provides details of the demand analysis to 100 kilometers. Nearly 18 percent of traffic by commodity, based on the EBRD-financed moving today on Russian railways is carried less studies of railways, waterborne transport, and than 100 kilometers, and as more heavy and roads. Except as noted, the demand information articulated trucks enter the road transport fleet and that follows is based on these studies. the highway network is developed, the breakeven distance will increase. In the United States, for Future Transport Demand and Change in Modal example, the distance at which rail becomes Mix. Looked at as a whole, the forecast of competitive with intercity trucking is 800 miles. transport demand in the FSU is sobering. The overall downturn of the economy and the shift Several factors affect the pace and size of the from raw materials and industrial goods to lower- shift of freight traffic from the rail system to road density general freight will keep overall transport transport in Russia: levels below those of 1988 for years, probably * The speed at which the economy recovers until 2015. The likelihood of flat or declining and becomes more market-oriented. demand for the next several years is quite high for * The rate of growth in new businesses that every major commodity in the freight transport generate time and service-sensitive traffic that traffic base. In fact, in view of recent trends and never will be shipped by rail. the World Bank's more pessimistic forecast of the 0 The speed at which road transport services energy sector, as discussed below, it is likely that are privatized and pushed by the drive of self- transport demand will be substantially below the sufficiency to provide flexible, fast and reliable EBRD-financed forecast, making it almost certain service. that demand will continue to decline. The other significant trend expected is an increasing shift Impact of Energy Subsidies. Offsetting these from rail to road. Compared with its present 13 factors could be the speed at which fuel prices percent share, it is expected that the road within Russia are brought to world prices and transport share of non-energy transport by 2015 passed on to the transport user through higher will be 22 percent in the low growth scenario and tariffs. Rail transport is more fuel efficient than 41 percent in the high growth scenario. truck transport. More than 70 percent of the tkm The dynamics of the shift from rail to road transported by rail are moved by electric power, depends upon the onset and vigor of Russia's which is theoretically less expensive than diesel- economic growth. The forecasts assume the ratio powered train transport. Electricity in Russia, of transport demand to GDP will be 1 to 1 for rail however, is also highly subsidized, because it uses and road transport until the economy begins to a large amount of subsidized coal and gas. The grow; thereafter, it is assumed transport demand government is being urged to eliminate its implicit will grow at a 1.25 to 1 ratio, with a general shift subsidy of all energy production. The degree to to road. The assumption is that transformation to which the relative transport tariff between rail and a market-based economy will cause a shift toward road transport changes as petroleum prices rise to lighter industrial and consumer goods and a world market levels will also depend upon the 30 Chapter 1 degree to which the government eliminates production which has also declined dramatically in subsidies to other energy producers. the last several years. For the future, coal exports World Bank analysis shows that the to Eastern European nations are no longer government's implicit subsidization of electricity expected to grow, but they may increase from is almost twice as high as the subsidy of Russia's far east to the Pacific region. The real petroleum based fuels. Based on estimates of fuel issue is whether overall coal exports of Russia consumption, rail transport's share of subsidies of will increase, since both the production and oil and electricity in 1992 was equivalent to transport of coal were heavily subsidized. Rb20.8 billion, using a simulated exchange rate of The driving force in Russia's energy sector now R91/US$1, while the for-hire road transport and for the foreseeable future is the dramatic drop industry's share of oil subsidies is about Rb5.0 in domestic consumption caused by the sharp billion. These subsidies represent about RbO.01 macroeconomic decline. Based on the decline in per tkm for railways while the road subsidy is on domestic demand, the World Bank estimates that the order of Rb0.09 per tkm, or about nine times energy production will decline by 20 to 30 percent that of rail. This means that the shift from rail to despite the fact that export demand for oil and gas road transport could be slowed by efforts to end should remain strong. The fall in domestic fuel subsidies although the degree to which it will consumption of oil and gas is likely to continue do so depends upon the total transport costs of through 1995 or 1996, with slow recovery in 1996 each mode. At the same time, the shift to or 1997. Coal production is expected to continue world prices of energy will also discourage to decline through the decade, driven largely by excessively long distances between industrial both the closure of uneconomic mines and the sources. This trend will reduce rail traffic and continuing decline in industrial consumption, and favor shorter distances where trucks have an will not be offset by the expected increases in inherent advantage. In the longer term, those who utility demand for coal. need to transport freight will make their decisions This scenario of future energy demand, based based on total transport costs including the on the World Bank's understanding of the Russian carrying costs of the merchandise during the energy sector, contrasts with the forecast of period of shipment, the costs of handling and energy production by the consultants who storage, and the transport costs per se. developed the transport demand forecast used in this report. This forecast energy production to Energy Freight Demand. Next to agriculture, grow overall at about 1 percent a year over the energy - comprising coal, oil, and natural gas - next 20 years, with oil remaining stable, coal is the most important sector in the CIS economy declining about 30 percent in energy terms, and in terms of transport demand. More than half of most of the growth related to increases in natural the work of the country's transport system gas production (exhibit 1.6). The forecast involves the fuel-energy complex. Rail transport "assumes an increase in the average haul for gas accounts for 97 percent of the coal tkm, making and oil as the more accessible fields are depleted rail indispensable to electric power generation and while the average haul for coal remains constant the steel industry. Rail handles a quarter of the as rationalization and a greater level of on-site petroleum transport, an inordinately high figure preparation balances the development of more compared to the percent in the United States. The distant coalfields".' Since the World Bank's energy sector and the non-pipeline transport sector energy forecast is more recent and based on a are inextricably linked in Russia and will be for more detailed analysis of the sector than the foreseeable future.8 undertaken by the EBRD-financed consultants, it Coal production has declined 20 to 30 percent is likely that energy transport demand will be since 1989, due principally to: (a) higher mining substantially lower than forecast in their studies. costs; (b) declining demand from the heavy For non-pipeline transport of coal and refined industry and power sectors; and (c) shifts to petroleum products, the major issue for the future alternative fuels (mainly gas). Demand for is to ensure that existing rail capacity is utilized domestic coal is particularly sensitive to steel efficiently. 31 Chapter I Minerals and building materials include cement, bricks, stone, sand and gravel, which make up Exhibit 1.6 Energy Transport Demand, large tonnages by rail, water, and road. Cement 1980 to 2015 production fell to 77 million tons in 1991 from a peak of 85 million tons in 1989. Demand for Nkm (sand, gravel, and aggregate, hauled predominantly by inland water transport, is concentrated in construction industries and road building. Demand in this sector will follow yet lag somewhat economic growth. Russia is the world's largest producer of wood products, with forest reserves located predominantly in the far east, east and west 1980 1990 Low Medium High Siberia, the northwest, and the Urals. Plywood, Coal MOil Gas chemical pulp, and paper products are increasing as percentages of total wood products. As Source: EBRD Railway Sector Survey Main Report production moves from the northwest and the Urals into Siberia, rail hauls, which carry 60 Non-Energy Freight Demands. The EBRD percent of wood product tonnage, should consultants' projections for non-energy related lengthen. Combined inland and river-sea transport transport were based on forecasts of GNP that accounts for about 29 percent of forest product assume an historic elasticity of I - as was the tonnage. Timber is a major river-sea vessel export case from 1980 to 1990 - until the turnaround in commodity and a major export commodity from the economy is reached. Thereafter, "the forecast Black Sea and far east ports. assumed that the transport-intensity declines as the Fertilizer production includes: (a) 7.5 million economy restructures until, when the economy has tons of phosphates; (b) more than 30 percent of reached a level twice that of 1989, the relative the world's potash production (1l million tons in level of transport has reduced by 25 percent"" 1988); and (c) the world's largest production of (exhibit 1.7). nitrogenous fertilizer. Future demand will depend on export markets, for which there is strong Economic sectors affecting non-energy bulk competition. Rail hauls 88 percent of the tonnage. transport demand include iron ore and steel, Phosphate exports pass through the port of minerals and building materials, timber, and fertilizers. Iron ore and steel transport requirements are Exhibit 1.7 Non-Energy Transport Demand, likely to fall as Russia (a) becomes more efficient 1980 to 2015 in steel-making by moving away from open-hearth technology, (b) substitutes lighter metals for steel in many manufacturing processes, and (c) reduces emphasis on defense industries. Russia's steel production - two-thirds of all CIS steel - peaked at 94 million tons in 1988 and declined to 78 million tons by 1991. It is likely to continue to . decline and may never recover to 1988 levels. - Decreased orders from the military will reduce consumption: other republics may also develop ...............,.... their own self-contained steel industry. Rail moves s. low .. JIM MW V co e0. 93 percent of iron and manganese ore mined and ->** -4- M *Cua =Hi about 76 percent of steel tonnage moved." Source: EBRD Railway Sector Survey Main Report 32 Chapter 1 Murmansk, while nitrogen fertilizers are exported distribution of Russia's international transport is primarily to Eastern Europe. the low level of containerization. Consultants estimate that the level of containerization in Agriculture Freight Demand. For the transport Russian transport is about one-fifth of the average sector, agriculture means grains, to which the CIS prevailing in international trade. In 1990, for countries devote more land than any other region example, about 10 percent of the 79.6 million tons in the world, but at low yields that leave the CIS of CIS international traffic was containerized. In behind both China and the United States in grain comparison, by 1989 about 46 percent of the production. CIS grain production in 1989 was 193 world's 625 million tons of international trade was million tons, which left them as a net importer of containerized. Attempts to introduce grains for several reasons: (a) difficult climatic containerization, such as the SeaLand landbridge, conditions in most grain growing areas; (b) widely have met with mixed results." Landbridge traffic dispersed grain growing areas; (c) inadequate, in 1992 was approximately 55,000 containers, poor quality storage; and (d) an insufficiently down from a 1989 high of about 100,000. In large trained and motivated work force. A 1992 study part this drop reflected the physical and of the FSU agricultural sector indicates that annual institutional strains affecting the rail network imports of grain into Russia have averaged 19 to growing out of the disintegration of the all-Union 22 million tons, consisting of about 50 percent rail system. wheat, 40 percent maize, and 10 percent barley. Only a small portion of Russia's grain imports are The difficulties afflicting every mode in Russia's from other CIS republics. Grain imports from transport system make it dificult to achieve the Kazakhstan have been 1.5 to 2 million tons per integration and cooperation needed for an year, virtually all of it wheat. Total imports from effective container system. Efforts to impose all other republics have been about 1 to 2 million containerization on the disorganized transport tons, mostly from Ukraine. The remaining 16 to system are not likely to succeed. The lack of a 20 million tons came from outside the FSU, healthy and growing container-based intermodal accounting for nearly half of all grain used as transport system for both international and food and about a seventh of all grain used as domestic trade will present physical and economic feed.2 The same report indicates that if subsidies barriers to the growth of Russia's international to beef producers in the form of underpriced feed commerce. grain are eliminated, demand for beef in Russia could drop by as much as 25 percent, with a consequent drop in the requirement to import grain. Exhibit 1.8 Passenger Demand, 1980 to 2007 Agricultural restructuring could virtually eliminate grain imports, and dramatically reduce imports of sugar, milk products, and vegetable WE= Poeengr km oil. While trucking plays the major role in short- haul food movements, 90 to 95 percent of the tkm " involved in domestic food transport is provided by rail. Grains made up more than 83 percent of the Io tonnage for food imports to the CIS in 1989, split loo almost evenly between Baltic and Black Sea ports. Inland waterway movements of grain average a minor 7 million tons per year, most of which are transshipments at Novorossijsk to river-sea vessels no 1"o L- .odium RI,O for delivery upstream." mUnu.. EC., MAi, =A11.-R.B Containers and International Commerce. Source: EBRD Railway Sector Survey Main Report Another factor affecting the economy and 33 Chapter 1 Passenger Demand. Passenger travel is expected railways are being encouraged to raise local to respond to changes in income levels and commuter rail fares in consultation with municipal changes in relative prices. According to EBRD authorities. The political climate for implementing consultants' forecast, "given constant prices, the such price increases may vary from place to place overall passenger market is expected to grow at and thus introduces intermodal distortions. the rate of growth of the economy with longer Nonetheless, demand for passenger traffic should distance travel growing somewhat faster and short- grow significantly. distance trips slower. Real price changes would The forecast described above seems difficult for similarly affect long-distance trips more than some transport experts in Russia to find credible. short-distance trips."'" The forecasts also take into Government forecasts do not incorporate such a account suppressed passenger demand within slow recovery nor any modal shift. They predict Russia and the FSU (exhibit 1.8) and assume no that traffic levels will rebound far more quickly intermodal distortions regarding tariff patterns or and do not foresee much shift from rail to road. subsidies. In fact, the government is increasingly Both Ministry of Railways (MPS) and the subsidizing passenger transport, although buried in government forecast a far faster rebound in rail support to local and regional budgets since transport demand than do the EBRD consultants responsibility for urban transport has devolved to (exhibits 1.9 and 1.10). local authorities. Responsibility for covering the In terms both of transport volume and task, cost of suburban commuter rail transport has been MOT projects recovery in all surface modes left to individual railways to cross subsidize with except for waterborne and pipeline transport freight resources. To improve cost recovery, local within the context of an overall rebound in authorities have been authorized to impose a tax demand (exhibits 1.11 and 1.12). By 1995, under on enterprises for urban transport and individual the influence of more favorable economic Exhibit 1.9 Russian Rail Passenger Projections (1988 = 100) Millions of Passenger-kilometers 210 1 8 0 ... ...- .. .-.. .. .. ...... .. .. .......... .. .. .. ........ ........... .. .. ........ ...... .. ...... .. .......... .. .. .... . ..... . 1 7 0 . .. . .. . .. .. . .. . . .. . . . . . . . . .. . .. . .. . .. . .. . . .. . .. . . . .. . . . ......... .... .. .... ..... ............... .......... . 1 7 0 - .. . . . .. . . . . .. . . . . .. . . . . .. . . . . .. . . . . .. . . . . .. . . . . .. . . . . . .......... . . . . . . . . . . . . . . . . . .. ......................... 1 S O.3 0 . .. .. .. .. ...... .... .. .... ...... ...... ............ .. .. .. ......... .. .......... .. .................. .. .. ... . .. ....* .. 19 0 - . . . . . . . . . .. . ... . . . .. . .. . .. . ... . . . . . . .. .. . .. . .. . .. . . . . . . ............. ............. . ..* ....** ............. 8 0 - --.. ... .. ... ... .. ... .. ... ... ............. ............ ........... .. ...... ..... ............... ... .. 7 0 F- ....--........... ... ......... ........ ..............-................................. . 1980 1985 1990 1995 2000 2007 2016 Year -Low (EBRD) -+Medium (EBRD) -*High (EBRD) -& M Ps Sources: Data and forecasts derived from EBRD Rail Sector Survey, p 35, and from Russian Ministry of Economy. 34 Chapter I Exhibit 1.10 Russian Rail Freight Projections (1988 = 100) tkm 110 1 0 I I 1 1 I1 1 1 I I II I I r I I I 1980 1985 1990 1995 2000 2007 2015 ~Low (ERD) -t--Mdium (EBRD) -*High (EBRD) 9MPS -*Russian Govt Source: EBRD Study, p 35; MPS projection from Mr. Razavaev; Russian Government projection from Ministry of Planning. developments, the increase in transport demand is countries (exhibit 1.13). Failure to acknowledge expected to continue, having reached by that time that changes in the economic framework will levels reminiscent of the 1970s. The volume and inevitably shift transport demand could lead to the task of pipeline transport, however, are projected inappropriate allocation of government resources to decline through 1995. in transport. On the basis of these projected increases, government transport planners argue for Impact on the Railway Sector. In broad terms, continuing investments and budgetary support on the shift to a market economy will significantly an almost business-as-usual basis. The railway reduce the level and composition of rail traffic as investment budget, for example, includes the economy as a whole shifts away from the expansion of existing lines, construction of new production of basic commodities and toward lines, and continuation of electrification without production of higher value goods. An additional any analysis as to whether these investments make shift will come with the growth of competition sense in light of more realistic forecasts, reduced from the trucking industry, a shift that will be demand and a changing customer base oriented enhanced by increased shipper choice. The toward fast, reliable service. The Minister of Russian railways system will have to undergo a Railways has also endorsed hiring 11,000 more major change in operations and service in order to employees for the expected recovery of rail traffic be able to respond to coming changes in transport levels. Based on experience elsewhere, the demand. Investment plans should be re-examined government's forecasts are too optimistic. A to ensure that they still make sense and that they further decline in transport and a shift in modal focus more on enhancing the use of available mix is inevitable, as government policies move resources than on expanding rail service. More away from a command to a mixed or market fundamentally, however, planners need to rethink economy as has happened in several other the economic and social role of railways within 35 Chapter 1 Exhibit 1.11 Actual and Forecast Volumes of Russian Freight Transport, 1991 to 1995 (million tons) Est Prol Prol Prol Mode 1991 1992 1993 1994 1995 All Traffic 23,601 19,088 17,700 18,201 19,101 including General Purpose 5,855 4,375 4,560 4,725 4,900 Railway 7,745 6,678 6,170 6,300 6,550 including General Purpose 1,956 1,825 1,910 1,975 2,050 Road 14,688 11,504 10,703 11,073 11,724 including General Purpose* 2,731 2,550 2,650 2,750 2,850 including Rosavtotrans** 2,396 2,350 2,250 2,325 2,450 including Own Account 11,957 10,700 10,900 11,100 11,900 River 564 374 339 363 382 including General Purpose 50 47 46 51 55 Sea 103 101 87 90 94 Pipelines 499 430 400 373 348 Air 2 1 1 2 2 *Includes international,intracity,intercity -Excludes Mosavtotrans and St. Petersburgavtotrans. As of 1993, "Rosavtotrans" will be a Russian joint stock trucking company. Volume of Russian Freight Transport, 1991 to 1995 Actual and Projected million tone 25,000 20,000 15,000 19911995 SOURCE: Mmnistry of Transport, RF, 4 November 1992 36 Chapter 1 Exhibit 1.12 Actual and Forecast Russian Freight Transport Task (billion tkm) Est Proj Proj Proj Mode 1991 1992 1993 1994 1995 All Traffic 4,388 4,236 3,385 3,410 3,488 including General Purpose 4,104 3,800 3,850 4,000 4,350 Railway 2,362 2,250 1,861 1,909 1,995 including General Purpose 2,319 2,150 2,275 2,375 2,450 Road 290 263 223 233 249 including General Purpose* 64 59 62 64 67 including Rosavtotrans** 55 51 52 54 56 including Own Account 235 204 206 211 221 River 200 183 137 146 154 including General Purpose 195 181 177 188 205 Sea 470 470 330 350 375 Pipelines 1,057 1,070 832 770 713 *Includes international,intracity,intercity "Without Mosavtotrans and St. Petersburgavtotrans. As of 1993, "Rosavtotrans" will be a Russian joint stock trucking company. Russian Freight Transport Task, 1991 to 1995 General Purpose Cargo Actual and Projected billion tkm 4,500- 4,000 - 3,500 - 3,000 - 2,000 - 1991 1992 1993 1994 1995 * Truck E River U Sea 1 Pipeline E Rail O All Modes SOURCE: Ministry of Transport, RF, 4 November 1992 37 Chapter 1 the context of a changing economy. A major created contractors, but the road funds are likely strategic planning and restructuring effort will to be insufficient to clear the backlog. undoubtedly be required to position the railway for the future. Impact of Changing Demand on Ports. The most immediate impact of the dissolution of the USSR Impact of Increased Road Transport Traffic. For on Russian ports was to diminish capacity. For the the reasons described above, freight and passenger future, plans to replace that capacity should take road traffic are likely to increase faster than rail several factors into consideration: traffic, putting increased demands on the highway * Russia's grain imports should fall over time infrastructure. Unless measures are taken to as domestic agricultural productivity rises and protect Russia's existing highway network from elimination of subsidies reduces demand for feed deterioration and collapse, the highway network grain. will constrain the expected growth in road 0 The evolution and restructuring of the transport. Poor quality construction or transport system will increase the need for rehabilitation, inadequate maintenance, and the efficient and economical container handling frequently poor quality of bituminous material terminals. used in road construction means that at least 38 In view of the macroeconomic situation, percent of the trunk road system requires however, it is inadvisable to commit to requested rehabilitation or reconstruction, at an estimated investments without rigorous cost-benefit analyses cost of about US$22 billion in the next five to and without considering individual port seven years. Many bridges also need attention. corporatization, privatization, and restructuring Without substantial reform and additional plans. funding, the highway sector will not be able to prevent the collapse of Russia's road Financial Performance of Transport Entities is infrastructure. Efforts to reform the institutional Declining. The decline in transport demand to role of highways are encountering difficulties. The date, combined with rising fuel prices and government has created a number of "concerns," inflationary pressures on wages, seriously or companies to replace MOT construction and undermines the financial integrity of Russia's maintenance organizations and has established transport system. Until recently, the transport road funds to finance works by these newly sector showed steady profits in all modes except for urban transport, which was cross-subsidized Exhibit 1. 13 Rail Share of Combined Rail and Truck (tkm) 110 1001 + CSFR 00 so 0 France 70- so- X Germany 50 - 0 U.K. 30- l Hungary 20-1 a0 z Poland eo 1s96 1970 1975 180 1 1 e8 Source: Privatization Problems at Industry level: Road Haulage in Central Europe, Bennathan and Thompson. IBRD Discussion Paper 182, 1992. p 7. 38 Chapter 1 with freight earnings. The single greatest federal competition among carriers, any normal analysis fiscal problem in transport has been urban of profits is irrelevant. Currently, there is no way transport, but the explosive growth in deficits on to assess the financial performance of road suburban commuter railways and in airline transport enterprises accurately, but anecdotal subsidies is also a problem. Public pressure to evidence indicates that trucking enterprises are maintain low prices for urban public transport, experiencing financial difficulties, particularly as intercity passenger air and rail transport, and rail collection of accounts receivable is increasingly freight transport will be great. Political officials, difficult. whose constituencies want to keep rates low in the 0 Urban Transport. Urban transport has face of declining individual purchasing power, are historically lost money, but the sector's current under tremendous pressure to let transport wage financial situation is so poor and worsening so costs rise along with other enterprise costs, such rapidly that funding its increasing deficits is now as spare parts and fuel, while holding down fares, a major problem for the federal government. Some highlights are instructive: According to MOT figures (exhibit 1.14), losses * Railways. Net income in 1991 for Russian for passenger transport were Rb3.17 billion in railways was only Rb300,000 compared to an 1991, estimated at Rbl00 billion for 1992 estimated Rb4.6 billion in 1990.16 Adjusting for (October 1992 prices) and expected to climb to inflation makes the situation even worse. The Rbl trillion in 1993. Of these totals, by far the operating ratio eroded from 32 percent in 1988 to greatest losses are in bus transport. 73 percent in 1990 and 99 percent in 1991. MPS * Sea and River Transport, and Ports. During is increasingly unable to subsidize losses in the Soviet period, ports and water transport passenger traffic, forecast at Rb53 billion in 1992. companies theoretically covered operating costs Total railway losses in 1992 were expected to be out of their service revenue incomes, and the Rb73 billion. The Federal budget was revised central authorities provided required investment. recently to support capital expenditures for This objective was hardly ever achieved, and the railways, particularly those requiring foreign FSU government had to allocate around Rb20 currency. The 1992 Federal budget included Rb22 million a year as operating subsidies to shipping billion for rolling stock purchases. The 1993 and ports. The Russian Federation not only Federal investment budget includes Rb109 billion for MPS. * Airlines. Aeroflot's operating results are Exhibit 1.14 Urban Passenger Transport deteriorating in real terms. Although operating Operational Losses (Rb billions) income reportedly rose from Rb504.9 million in 1990 to Rb2.5 billion in 1991," expenditures were expected to exceed revenues by R18.6 billion. As 1993 of November 1992, Aeroflot estimated that its 1991 1992 Est. revenues cover only 70 percent of its costs. Busee 1.73 58.3 589.6 * Road Transport. Financial data for road Metros 0.34 4.4 11.0 transport is difficult to obtain and confusing to Surface urban electric 1.10 23.6 425.0 transport analyze since there are so many enterprises that Total 3.17 100.3 1,014.6 conduct both passenger and freight transport and use the revenues of the latter to support the Railway passenger losses 204.0 former. According to figures from the annual statistical compendium National Economy of the a. With suburban routes. USSR, road freight transport was profitable through 1990, total earnings were Rb5.5 million, Source: Russian Ministry of Transport, given to World g ', Bank mission, November 1992 and June 1993. For and it subsidized urban transport. It is not clear railway estimate, Interfax Business Report, No. 29 whether these figures include freight transported (432) 11 February 1993, p 3. by Agroprom enterprises. In either case, as costs were passed oa to customers and there was no 39 Chapter 1 Exhibit 1.15 Financing Transport from the State Budget, 1992 (billions of rubles) Internal Road Railways Aviation Maritime Waterways Transport Total Mode 1992 1993 1992 1993 1992 1993 1992 1993 1992 1993 1992 1993 State centralized 22.0 109 17.80 40.8 2.60 210.4 2.40 14.6 17.40 26.4 62.20 401.2 capital investment Education 7.0 2.35 2.00 1.60 0.54 13.49 Health care 4.0 4.00 R&D 0.85 0.06 0.06 0.06 1.03 Maintenance 2.90 2.90 Hydrographical, 0.44 0.44 rescue & other special services Subsidy for 1.5 34.80 47.0 2.0 0.40 5.0 81.90 1014.6 118.60 1068.6 passenger transport operating losses Total 34.5 109 55.80 87.8 5.10 212.4 7.40 19.6 99.90 1041.0 202.70 1469.8 Source: Russian Ministry of Transport, provided to World Bank during missions in November 1992 and June 1993. discontinued such subsidies, but introduced new adding provisions to provide subsidy payments in taxes - 32 percent on ruble profits and 50 percent the federal budget (exhibit 1.15), the MOT 1992 on foreign exchange income - which now have to budget included about Rb202.66 billion from be paid by ports and water transport companies. government to support losses and investments in The combined tax and mandatory hard currency all modes of transport, excluding highways, for transfers to the national treasury are estimated to which new road funds were created. Subsidies for have reached the equivalent of about US$400 operating losses alone were estimated to be million in 1992. Rbll8.6 billion, including an estimated Rb89.9 Ability to Make Investments in Equipment and billion to cover losses from municipal urban Operations is Declining. Declining cash flow and transport, much of which is financed by the inflation is seriously reducing the ability of the federal budget in the form of subsidies to local transport sector to replace assets and maintain and territorial budgets. According to MOT, total operations. Despite increased expenditures, the urban transport losses are expected to climb to ruble's declining value has meant decreasing Rbl trillion in 1993. levels of rolling stock actually obtained. The economic situation in Russia has also lowered the Comparison of Federally Supported Transport supply side of transport vehicles. The production Expenditures to the State Budget. Total of trucks decreased by 5 percent from 1991 to expenditures in Russia's 1992 state budget have 1992, and production and deliveries of rail been estimated by the World Bank to be on the equipment dropped by even greater levels. order of Rb7,730 billion. Included in this amount are: state financed investments of Rb459.6 billion, Transport Losses and Subsidies. Transport budgeted subsidies of Rbl,315 billion, defense losses have already resulted in the government's expenditures of Rb855 billion, foreign 40 Chapter 1 expenditures of Rbl,422 billion and other subsidies, which in 1992 exceeded the budget operational expenses, including socio-cultural deficit as defined by the Ministry of Finance, is activities, internal security and administrative another area where the government provides costs, of Rb3,640 billion. support to the transport sector. Transport's total share of such import subsidies could not be Expenditures within any given sector are determined, although railways received support difficult to compare to the overall budget because for the acquisition of rolling stock imports. costs from each sector are spread among a variety of categories. For comparison, the World Bank Implicit Energy Subsidies. Subsidies - both has limited its examination to calculating the explicit and implicit - are an impediment to transport sector's share of budgeted subsidies, attaining macroeconomic stability and overall unbudgeted subsidies, state financed investments, economic recovery. Energy consumption is by far and implicit subsidies. Comparison of transport the largest subsidy in Russia, and its opportunity subsidy expenditures to the entire federal budget cost, measured at the market exchange rate, is exceedingly difficult, as the budget categories greatly exceeds total GDP. This subsidy is mainly are being revised and because complete implicit and results from the large discrepancy information is lacking regarding transport's share between domestic prices and the value of energy of unbudgeted subsidies from import subsidies or at world prices. According to World Bank import subsidies through CBR's directed credit analysis, implicit subsidies of energy represented programs. Russia's 1992 federal budget 122 percent of GDP in 1992 at an Interbank expenditures, including defense, directed exchange rate of Rb203/US$1 (exhibit 1.17). The subsidies, and state investments totalled Rb5.5 analysis also attempted to measure the relationship trillion, while total revenues were Rb4.7. Total of energy subsidies to GDP, taking into account GDP for 1992 has been estimated to be Rb15.7 the effect increased energy exports would have on trillion. Budgeted Subsidies. Based on World Bank analysis of data obtained from the Ministries of Finance and Transport, budgeted transport Exhibit 1.16 Transport Subsidies Compared to Total subsidies totalled Rb143.0 billion including State Budgeted and Unbudgeted Subsidies, subsidies for operating losses of urban transport 1992 (millions of rubles) and support to airlines and railways for fuel increases and tariff support (exhibit 1.16). This Transport Total is equivalent to 11 percent of Russia's budgeted Budgeted subsidies 677.7 subsidies. World Bank analysis shows that Consumer subsidies explicit budgetary subsidies throughout the Public transport 81.9 economy are equivalent to 22 percent of GDP; Airline tickets, northern regions 24.8 Railways and aircarriers 36.3 thus, transport subsidies are 2 percent of GDP. Subtotal 143.0 Producer subsidies 637.6 Unbudgeted Subsidies. The federal Total subsidies 1,315.3 government also subsidizes enterprises and Percent transport related 11% agencies by subsidizing import and by extending Unbudgeted or partially budgeted directed credits from the Central Bank of Russia subsidies Import subsidies 2,721.3 (CBR) through the Ministry of Finance (MOF). Interest subsidies 3,145.2 These subsidies are estimated to represent 21 Total, unbudgeted subsidies 2,963.1 percent of GDP. The degree to which such Total subsidies 4,278.4 credits are provided to the transport sector is not known, but government support has clearly been given for transport investments where earnings urcebData provided by Russian MOF. Calculations provided do not cover the cost. "Off-budget" import 41 Chapter 1 the exchange rate if oil and gas export restrictions new ships. Another Rb26.4 billion is included in are liberalized. The magnitude of energy subsidies the federal capital investment budget, but not was calculated a second time using a simulated within the MOT budget, to purchase buses for exchange rate proposed by the Research Institute urban transport. In determining the priorities for on Prices of the Russian Ministry of Economy. such imports, MOT works closely with MOF. For The implicit subsidy at the simulated exchange every dollar spent on imported buses and spare rate of Rb9l/US$1 represented half of GDP. parts, MOF provides eighty cents to cover the Although the analysis should be treated with exchange rate burden. caution, it shows the pressing need to rationalize energy prices. Operating Subsidies. As inflation continues, these deficits are likely to soar and there will be World Bank estimates of the physical volumes increasing demands on the federal budget to of energy consumed show that transport's share of subsidize various transport operations. all oil produced in Russia exceeds 22 percent and * Railways. The revised federal budget of its share of domestic consumption exceeds 36 May 1992 estimated railway passenger losses to percent. As a share of GDP, therefore, the be Rb53.3 billion, most of which are cross- government's implicit subsidy to transport is subsidized by freight earnings; but in mid-year, between 5 and 13 percent, depending on the Rbl.5 billion was added to the federal budget to exchange rate used. World Bank estimates show help subsidize railway passenger losses. MPS' that transport's share of electricity consumed in proposed 1993 budget included an allocation of Russia is about ten percent. As a share of GDP, therefore, the government's implicit subsidy of electricity to transport is between 2.5 and 6 percent (exhibit Exhibit 1.17 Subsidies on Energy Consumptiorr 1992 1.18). State-Supported Investments. The Subsidy Subsidy Subsidy Subsidy as 1992 federal budget includes Rb62.18 Level as Share Level Share of billion for transport investment and (trillions of GDP (trillions GDP 12 percent of the total state Rb) (percent) Rb) (percent) investment budget, excluding defense. Simulated Exchange Interbank Exchange Rate Railway investments were on the Type of Rate (Rb91/US$) (Rb203/S$) order of Rb22 billion and another Energy Used Rb42.18 billion supported MOT Oil 2.1 13 5.5 35 expenses, including the acquisition of Gas icebreakers. The 1993 federal capital investment budget includes Rb59 Coal 0.2 1 0.5 3 billion for MPS to purchase rolling Electricity 4.0 25 9.8 62 stock and Rb50 billion to construct rail facilities and lines of national Total energy 7.9 50 19.2 122 importance. The 1993 Federal capital investment budget for MOT totals investment bllion, iln tls a. Estimates include projections for the fourth quarter of 1992. 9 bGDP for the whole year is estimated at Rbl5.7 trillion. billion to purchase maritime vessels, Rbl4.6 billion for river vessels, and b. In order to avoid double counting, Rb3,111 billion (Rbl,408 Rb37.9 billion for airplanes. In billion) has been deducted from total subsidies, since 30 percent of addition, a Rbl96.4 billion fund, to coal and 45 percent of gas are consumed by the electric power be financed from foreign exchange sector. revenues earned by the maritime Source: World Bank calculations. fleet, has been established to acquire 42 Chapter 1 Exhibit 1.18 Physical Energy Consumption by Transport Modes, 1992 Petroleum! Electricityb Gasc (million tons) (billion kilowatt hours) (billion n) Total 91.3 82.89 1.72 Rail' 4.3 37.45 Air (domestic and internationalf 7.8 Trucks, intercity buses and automobiles 61.0 1.72 (including Agroprom)' Urban buses 2.2 Inland waterways 10.5 Maritime fleets 5.5 Trams, trolleys and metros 45.40" a. Total oil production in Russia in 1992 is approximately 399 million tons, of which 250 million tons equate to apparent domestic consumption. Thus, transport's share of oil is in excess of 22 percent of total production and in excess of 36 percent of apparent domestic consumption. b. Total electricity production in Russia in 1992 was estimated at 852.4 billion kilowatt hours (kWh) by a World Bank/International Energy Agency (IEA) joint mission to Russia in late 1992. Transport's share of electricity in 1992 is estimated to be 10.3 percent, based on the mission's estimates of actual share of electricity consumed in 1990 and 1991. c. Total gas production in Russia in 1990 was 404 billion m'. Transport's share of direct natural as consumption was only 0.4 percent. Since the number of natural gas powered vehicles remained about the same from 1989 through 1991, it was assumed the 1990 consumption would remain about the same in 1991 and 1992. Transport's share of implicit gas subsidization is accounted for, in great part, in the implicit subsidy to electric power consumption, of which gas is a primary input. d. Does not include industrial railway energy consumption. e. Fuel used on international flights (roughly 1.3 million tons) are included since their fuel prices are subsidized by Government. Moreover, as the world price for jet fuel is on the order of US$188/ton as compared to US$130 per ton figure for oil used in the analysis of energy subsidies, the estimate of implicit fuel subsidy to this subsector has been understated. f. Includes 35 million tons/year gasoline consumed by vehicles operating on inter-urban roads and 2.6 million tons/year diesel consumed by vehicles operating on intercity roads. g. It is assumed that the maritime fleet involved in international trade obtains 50 percent of its fuel (5.1 million tons) while abroad so this difference is deducted from the total maritime fleet of 11.0. h. 28.1 billion kWh of this total are consumed by trams and trolleybuses (based on 1992 consumption figures). The balance can be attributed to metro system consumption. Sources: Petroleum information from Interfax reports, PlanEcon data, and World Bank data. Rail data from Statistical Report on the World of Railway Transport for 1990. Electricity data from Russia Electricity Demand Forecasts prepared by IBRD/IEA mission, December 1992. Aviation data from Aeroflot Annual Reports, 1990 and 1991. Urban transport data from Moscow Resident mission data research. All others: World Bank analysis of material provided by Russian MOT. 43 Chapter 1 Rb204.4 billion as of November 1992 to cover of the upgrading. It is expected that 70 percent of losses on passenger transport, but the government the fees will be collected in hard currency and the since decided to require MPS to subsidize subsidy is expected to be necessary only in its first passenger losses from freight earnings and has not year of operation. made any provision to finance rail passenger losses in 1993. This will undermine the railways' Reducing the Fiscal Burden of Transport Losses. long-term sustainability. The government is trying to cope with this fiscal * Airlines. The government responded to the crisis by allowing the enterprises to raise tariffs deteriorating situation of its domestic airlines by and by introducing criteria for limiting subsidies providing Rbl5.0 billion for airline fuel subsidies to specific expenses, such as fuel increases, rather in the 1992 budget. The 1993 federal budget also than subsidizing general losses at any cost. Freight includes Rb25 billion for subsidies for air transport tariffs have increased frequently in the transport to northern territories. These funds are last two years, by a magnitude of 81.1 for rail, 20 to be given to the local population rather than the for airline, and 28 for road transport airlines themselves, however, and are expected to (exhibit 1.19). The tariff increases are not at least triple during the year. sufficient to arrest the financial decline from high * Urban Transport. The 1992 budget included fixed operating costs and the increasing gap Rb8l.9 billion for intercity losses of urban between the timing of cost increases and tariff transport, most of which appears as unidentified increases. Other specific measures include: subventions to local governments and in subsidies * Railways. With respect to increasing losses to territories. MOT officials report total urban for suburban and commuter traffic, the transport losses for 1992 to be about RblO government has given responsibility for setting billion. Although the government allows local fares to individual railway administrations and authorities to impose municipal taxes to help cover local municipalities. Unfortunately, this can put an urban transport losses, MOT estimates that such even greater burden on individual railway taxes could only cover 40 percent of the losses. divisions which sometime lack the data or clout to The estimated urban transport losses for 1993 are push increases through municipal councils. expected to soar to Rbl trillion. 0 Airlines. The government has determined to * River Transport. The 1993 federal budget end tariff and fuel subsidies and to permit airlines includes Rb5 billion to support inter-regional river to raise tariffs to cover costs provided profit does transport and the funds are to be given directly to not exceed 20 percent of revenue. It is unlikely the shipping companies. the profit ceiling will be a problem, however, as * Ports. The 1993 federal budget includes Rbl Aeroflot estimated fares would have to be raised billion to provide subsidies for about 15 northern 3 to 4 times simply to cover operating costs, and ports where trade levels make it difficult for them 7.5 times to fully cover costs. Such tariff to be self-sufficient. increases will obviously decrease demand and * Maritime. The 1993 federal budget includes carriers are reluctant to try to recover capital costs Rb 1 billion for subsidies to support about 35 ships as well as operating costs lest traffic be reduced to in the ice breaker fleet. The subsidy is to pay the what are considered unacceptably low levels. difference between costs and revenues of the fleet; Aeroflot was attempting to balance flight tariffs are set by the state commission on tariffs. reductions and tariff increases in a manner that maintained about an 80 percent load factor, but * Air Traffic Control. The 1993 federal budget now that there are at least 174 domestic airlines, includes a first time subsidy for the first year's competition and fuel availability are driving the operation of a newly established air traffic control situation. MOT's budget request included (ATC) system. The system was previously run as provision to subsidize the cost of new aircraft for part of Aeroflot and has recently been separated Aeroflot international and domestic carriers, but into an autonomous entity. The government is in no such funds are included in the federal budget. process of upgrading the system and establishing Some sort of directed credits or loans for such user fees to finance the operating and capital costs purpose are undoubtedly under consideration. 44 Chapter 1 Exhibit 1.19 Transport Tariff Index Adjustments from 2 on 17 Magnitude of from 18 Magnitude of January May from 18 Increase from September Increase from Freight 1992 1992 May 1992 December 91 1992 December 91 Railway 81.1' Aviation 5.0 2b 10 2.0b 20.0 Maritime 5.0 1.9 2 19 2.2 41.8 Internal waterway 3.5 1.7 3 18 2.5b 45.0 Road 3.6 1.9 2b 14 2.0b 28.0 from 2 on 17 Magnitude of Magnitude of January May from 18 Increase from from 18 Increase from Passenger 1992 1992 May 1992 December 91 Sept 92 December 91 Railway 13.5 Aviation 3 1.8' 1.5 3.0b 24.3 Maritime 2 1.5' 2.0 1.5 9.0 Internal waterway 2 1.5d 2.0 1.5 9.0 Road 2 2.0' 2.0 2.0 16.0 a. 53.9 for agricultural products c. from 1 April 1992 e. from 1 March 1992 b. free tariffs with rate of return of 35 percent d. from 15 March 1992 f. from 27 April 1992 Source: Data provided by Russian MOT to World Bank mission, November 1992. * Urban Transport. The government is trying 0 Waterborne Transport. River transport to reduce the problems of urban transport by operators have now been given complete freedom devolving responsibility for operations to local to fix freight rates and passenger fares. Since municipalities along with the authority to early 1992, freight rates have been increased 20 introduce a municipal tax to subsidize transport fold and river passenger traffic is rapidly losses. Some municipalities are raising fares, but declining. The 1993 budget includes Rb5 billion it is estimated that only about 15 to 20 percent of to cover inter-regional passenger river transport. costs are currently being covered through the fare International ocean transport has also been granted box. pricing freedom, but the situation is different with To date, however, losses continue and the cabotage (domestic coastal) trades. government has no system of performance criteria Water transport is not remunerative since in place that would help curb the increases. cabotage cargo volumes are generally low, and the Subsidies are based on unit costs per kilometer of trade flow is unbalanced. Subsidies may be transport service provided, whether empty or not, required to continue cabotage trades serving without relating them to improvement in outlying communities that have no other access to performance. MOT reports that losses find their the outside world and thus no way to receive way into the federal budget as subventions to the supplies. For this reason, the 1993 budget Federal budget in support of local governments. includes subsidies to ships serving the northern 45 Chapter 1 territories and about 15 northern cabotage ports. To the extent that DSCs are given to state Such subsidies now cover the difference between procurement agencies, the largest recipients of costs and tariffs and have not been designed with credits, a federal contract system is needed to bid an aim at encouraging efficiency and minimizing for needed services and supplies. Where DSCs costs. serve social objectives, such as support for wages in non-profit enterprises, the financial sector Improving Fiscal Governance of the should not be forced to assume government Transport Sector responsibilities. DSCs should be used as little as possible to Reducing subsidies and rationalizing the energy finance the restructuring or modernization of the sector are essential to a stabilization and economy's productive apparatus, as it is not restructuring program in Russia and, if evident that a recovery in output will require an implemented, will help to reduce the fiscal burden increase in investment. Such credit decisions of the transport sector. Neither macroeconomic should be based on specific proposals with stabilization nor enterprise restructuring can monitorable targets aimed at restructuring proceed without a rationalization of the transport enterprises, including downsizing or spinning off system and a reduction in the overall volume of its ancillary activities, and divesting them of state subsidies and transfers. This will require: (a) control. State owned enterprises to be privatized, downsizing and restructuring the system of closed or liquidated should be denied any access subsidies and directed credits to enterprises, (b) to DSCs. For example, DSCs should not be used enforcement of financial discipline on enterprises to purchase new aircraft or trucks for soon-to-be- remaining in the public sector, and (c) reforming privatized companies, to modernize and expand energy pricing and taxation, which will yield network capacity for railway freight operations or larger exports and the additional revenue for to expand the merchant marine fleet, unless their sustainable adjustment. full costs are passed on to the newly privatized 0 Limiting Directed State Credits (DSCs). companies. No directed credits should be provided DSCs represented about half of total bank credit to the trucking industry or to ports unless they are in 1992, yet mechanisms for determining the restructuring. amounts and recipients of these credits are largely * Eliminating Interest Rate Subsidies. arbitrary and non-transparent. In most instances, Subsidies to support interest rates should be no specific, credible conditions for enterprise eliminated entirely to all sectors and the Central reform are attached to the credits. DSCs are Bank's finance rate should be brought into line generally inefficient forms of resource allocation, with market rates. serving such purposes as compensating for price 0 Financial Discipline on State Owned distortions due to price controls, providing a Enterprises. On a macro level, government should social safety net, or perpetuating non-viable put ceilings on the total amount of subsidies and patterns of production. financial flows available to the whole state owned To the extent DSCs are aimed at compensating sector, and then establish borrowing limits and distortions from price controls, the best solution is monitor financial flows for each enterprise. To to liberalize prices. To soften the impact of losses help implement this strategy, the largest recipients that might result, financial support should be of assistance should prepare annual and quarterly granted to enterprises and conditioned to specific business plans, reflecting borrowing limits and reform measures. For example, where targets for financial results. A special entity liberalization of fuel prices to urban transport should be in charge of reviewing and approving would increase losses, grants should be tied to these plans and monitoring their implementation. performance improvement and cost recovery Public investment in these enterprises should, for measures. Subsidies to merchant marine fleets the most part, be limited to downsizing, passive operating in the northern zones, transport services restructuring, or preparing for privatization. to specific communities, for example, should be Railways, airlines, ports, and the merchant based on competitive bids. marine fleet are increasingly looking to the federal 46 Chapter 1 government for investment support. As the supported by the Ministries of Economy and government has decided to privatize airlines, Railway. Money has already been allocated for ports, and the merchant marine fleet, investment feasibility studies, although MOF reports that the support to these sub-sectors should be tied to government would permit construction only if it restructuring and privatizing efforts. Where were found to be self-sustainable. Such an privatization is complete, as in the case of the investment cannot be self-sustaining and should be merchant marine fleet, further credits should not discouraged at the outset, particularly in view of be extended. Recently the government decided to current economic conditions and overall priorities set aside foreign currency earnings of the for investment. All these investments are being merchant marine fleet to establish a fund for considered seriously by the government. If financing ship replacements. Even if such set funded, most donor agencies would consider them asides represented a good use of foreign currency, major deviations from the government's overall it is unfortunate that the government will reform efforts. determine which companies are to be eligible for the funds. The railway sector is a large recipient Accounting and Financial Management for which periodic plans and performance targets Information Systems. In order to improve should be set. Within that sector, there is scope transport, the government and transport managers for spinning off or privatizing ancillary activities, need to have a better understanding of when and and it is hoped that government assistance will be why they are losing money. Current transport linked to such reforms. accounting systems are a major obstacle to correcting structural and operational inadequacies. A Sound Investment Policy is Essential to Curb Enterprises cannot be restructured, costs cannot be the Growing Fiscal Impact of Transport. Care isolated and analyzed, and over investment cannot must be taken to guard against superficially be rationalized without properly structured attractive investments in new infrastructure and operational and financial information. equipment that cannot cover their operating and capital costs. MOT is attempting to limit transport Inter-Enterprise Debt. The government also investments by permitting airlines and ports to needs to assist in the restructuring by helping to corporatize, ultimately to privatize, and to seek straighten out inter-company debts and by letting financing for new capital investments from joint poorly performing enterprises go bankrupt so they ventures. Nonetheless, government has already do not add to the burden of transport enterprises. approved investments by airlines and railways for MPS spokesmen reported that railways were owed purchase of rolling stock, continued expansion of Rb80 billion, whereas other enterprises were owed rail lines, purchase of replacement aircraft, and only Rb40 billion. The problem is exacerbated by development of airports. Most of these the fact that a Central Bank freeze on credits in investments are being approved in the absence of account number 725 means that many enterprises an assessment of their costs and benefits. with positive cash flows have their funds tied up Other investments under consideration involve and could not pay their debts even if they were new generations of aircraft, elaborate air traffic willing to do so. An estimated Rbl0.5 billion in control systems, a new maritime fleet ill-suited to credit for all state owned enterprises is in this the market, and port investments that duplicate account. capabilities that were previously part of an integrated FSU port system. Even investments Major Restructuring of the Transport Sector Is considered for routine replacements of aging Needed. Actions taken by the government to date aircraft, river vessels, ships, and railway rolling are not likely to stem the growing gap between stock should be examined in the face of falling revenues and transport costs. The government demand and the need to put in place better needs to take a positive decision to resolve the mechanisms of financial control with parastatals. overall problems facing the transport sector. Another example is adoption by the government Regarding macroeconomic policies affecting fiscal of a decree to establish high speed rail, a project subsidies, directed credits, and lack of controls on 47 Chapter 1 the finances of state-owned enterprises, the 4. According to ATA's American Trucking measures are identical to those being applied in Trends, 1991-92, gross freight revenues in the other sectors throughout the economy. Regarding trucking industry in the U.S. totalled US$272 specific strategies for remedying the basic billion in 1990, representing 78 percent of the organizational, structural, and management nation's freight bill and 4.9 percent of GDP. problems of transport operating enterprises and Accordingly, total transport expenses amounted to government agencies, the measures must be US$349 billion and represented 6.3 percent of designed to the needs of the entity involved. GDP. In short, major efforts to reform and restructure transport enterprises are needed to control and 5. Sources: World Bank Development Report reduce their claims on state resources. Given the 1991, Table 30; L.W. International Financial volumes involved, there is no reason for ports, Research, Inc. [Bulgaria, Czechoslovakia]; The airlines, railways, or road freight transport to lose Economist, January 12, 1991, p 65. money and ways exist to keep urban transport losses to a minimum. On the whole, this reform 6. Booz * Allen & Hamilton/Travers Morgan. is best accomplished by privatizing as many EBRD Railway Sector Survey of the Railways of transport functions as possible and letting the Russia, Ukraine, Belarus, and Kazakhstan, marketplace bring expenses and revenues into London: July 1992, p 20. line. This is true even for urban transport, but a competitive structure can help keep subsidies to a 7. PlanEcon is a research and consulting firm minimum. founded in 1984 which provides investment Because of their vertical integration and advisory services, business consulting, and monopolistic nature, railways, airlines and ports economic information of Eastern Europe and the will require specific restructuring and reform to former Soviet Union. keep them from becoming a major burden. Their current structures are not suited to providing 8. With 90 percent of energy resources situated efficient and reliable service in a market economy, east of the Urals, and two-thirds of energy nor are their management incentive structures consumption in the European regions of Russia, geared to change. there has been a systematic growth in the flows of energy from east to west, amounting to 1.15 billion tons of standard fuel in 1990. In the future, these flows will increase to 1.3 to 1.4 billion tons Notes of standard fuel, which will demand a corresponding development in transport. See A. 1. Russian Economic Reform, Crossing the A. Makarov et.al., Concept of the Energy Policy Threshold of Structural Change, A World Bank of Russia in the New Economic Conditions Country Study, August, 1992; Table 2-3: Gross (Moscow: Energy Research Institute of the Domestic Product by Industrial Origin at Current Russian Academy of Sciences, September 1992), Prices, 1989-90. pp 47-48. 2. Oxford Analytica Asia/Eastern Europe 9. Railway Sector Survey of the Independent States 12/31/92. Subject: Political and Economic of Russia, Belarus, Ukraine and Kazakhstan, Prospects for the Former Soviet Republics in EBRD Main Report, July 1992, p 21. 1993. 10. Railway Sector Survey of the Independent 3. Russian Economic Reform, Crossing the States of Russia, Belarus, Ukraine and Threshold of Structural Change, A World Bank Kazakhstan, EBRD Main Report, July 1992, p 9. Country Study, August, 1992; Table 2-3: Gross Domestic Product by Industrial Origin at Current 11. Russian Economic Reform, Crossing the Prices, 1989-90. Threshold of Structural Change, A World Bank 48 Chapter 1 Country Study, August, 1992; Table 2-3: Gross 16. The estimate represents 69 percent of the Domestic Product by Industrial Origin at Current consolidated net income for the entire railway Prices, 1989-90. system in the FSU, a figure based on percentage of traffic units hauled on Russian railways 12. Country Department III, Europe and Central compared to the total hauled throughout the Asia Region, Food and Agicultural Policy system. See exhibit 3.2 for details. Reforms in the former USSR (Washington DC: The World Bank, September 1992), p 42. 17. Aeroflot Annual Report, 1991. 13. EBRD, Waterborne Transport Survey: Russian 18. Account number 725 is a special CBR off- Federation, Draft Final report, July 1992, balance sheet account for state owned enterprises NEDECO/HASKONING. pp 4-25. established to net out receivables against payables reported in the accounts of the banking system and intended to facilitate the settlement of inter- 14. SeaLand, a freight forwarding affiliate of the enterprise arrears. U.S. transport company CSX, has entered into a joint venture with MPS to operate the "Trans- 19. L. Kizilova, "Problems and Opinions: Siberian Express" Service. Conversion into Joint-Stock Companies. What's Behind It?" Interview with Russian Deputy Minister of Railways K. Kh. Salatov. Gudok, 11 15. BoozeAllen & Hamilton/Travers Morgan, September 1992, p 2. Translated as "Deputy Railway Sector Survey of the Independent States of Minister on Railway Economic Restructuring" in Russia, Belarus, Ukraine and Kazakhstan, FBIS, Central Eurasia (FBIS-USR-92-130) 10 December 1992, p 23. October 1992, pp 30-31. 49 2 Institutional Framework for Transport Before reviewing in detail the organization of each functions, the financial and operational scope of transport mode it is useful to have an overall which was orchestrated by the Ministry of perspective on the organization and the basic Planning. institutional issues that transport as a whole faces. * The freight segment of the transport plan This chapter provides that overview, with a brief was designed to rely primarily on railways to haul description of transport organization under the freight, except for short hauls and urban USSR and a discussion of the major institutional distribution. anomalies that remain to be resolved. Detailed * For intercity passenger movement, railways descriptions of the organizational schemes and and airlines were the principal modes, organized institutions for each mode are provided in as separate cabinet ministries. subsequent chapters. * All aviation services were provided by the Ministry of Civil Aviation (Aeroflot). Transport Institutions under the * All rail services for freight and passengers, Command Economy of the USSR including suburban commuter rail services and major metropolitan subway systems (metros), Prior to the breakup of the Soviet Union, annual were provided by MPS. central plans specified in detail the role of each * The waterborne sector was organized into mode of transport in the movement of passengers two ministries, the Ministry of Merchant Marine and freight. The plan provided the needed funding and the Ministry of River Transport. for investments in fixed facilities and operating * Road construction was provided by the equipment, established tariffs for passengers and Ministry of Construction and the road ministries freight, and coordinated detailed operating of the republics. schedules for the movement of raw materials, * Commercial road transport was provided by foodstuffs, manufactured goods, and defense the Ministry of Automotive Services. shipments. This approach to the organization and operation of the economy obviated the need for an * In addition, most ministries, including those intermediate MOT to coordinate the planning, for Agricultural Machinery, Agriculture, Energy, investment, regulation, administration, and Industry, Finance, Interior, and Defense and operation of the different elements of the transport Military Industry had transport functions that did, sector. and still do, consist largely of truck transport provided by "own-account" entities - wholly- The main elements of the transport sector were owned subsidiaries of non-transport-sector fragmented into a variety of ministries that carried parastatal enterprises in sectors such as agriculture out independent transport or transport-related and construction. 51 Chapter 2 Exhibit 2.1 Structure of Transport within the Russian Government PRESIDENT Concdil PoliyhsTransport, Telecommunication, & Spa Council~munca o iyAvsr oni PRIME MINISTER Office of the Prime Minister Deputy Prime Minister for Transport Sector Affairs Ministry of Ministry of Ministry of Telecom- Transport Railways Amunication State Committee State Committee for for Indus ty plan a C sti o on AnA d v . Com. for Adv. Com. for Adv. Com. for Adv. Com. for Standards & Information & itme efa th e Construction la lurical n Chemical & Measurements Computer muce it in ustr Equipment Indutr fo i Industry Ac ication Conversion Source: Russian Ministry of Transport. The legacy of the command economy for the MOT. In addition to MOT and MPS, there are transp ort is twofold. First, it left the two State Committees and seven Advisory government completely unprepared to plan and Committees that still carry out functions related to manage a transport sector that could effectively the transport sector (exhibit 2.1). There are also serve a market-based economy. Second, it left the a number of large, independent, parastatal government with a large capital stock of enterprises; these will be addressed as the infrastructure and equipment, much of it in poor haiatioarmewor fordinat each mode is repair, little of it well suited to effective described. coordination with other transport modes, and all of it (except railways) dramatically underutilized The Minisy of Transport compared to the standards of the world's best practices. The Ministry of Transport (MOT) was formed from the shell of the former Ministry of Current Transport Institutions of the Automotive Services, which -given the massively Russian Federation increasing role that road transport is likely to play in the reformed Russian economy - may be In the wake of the dissolution of the USSR and fortunate. MOT's charter extends to all of the decision to shift to a market economy, the transport except railways, although the Ministry Russian Federation completely restructured the has a department to coordinate rail transport institutional framework of its transport sector. policy. With the exception of railways which remained as a separate and independent MPS, all the single- The Ministry consists of three basic mode ministries were incorporated into a new organizational clusters: (a) administrative 52 Chapter 2 departments organized along functional lines to passenger movement by road, through an umbrella exercise authority for regulation, enforcement, organization called Rosavtotrans, the successor to training and professional development, research the former all-union organization Soyuzavtotrans. and technology development, international affairs, Rosavtotrans comprises the 78 subsidiary intermodal transport, and labor relations; (b) small organizations that made up the Russian part of modally-based groups, vestiges of the Soyuzavtotrans. These 78 organizations, which headquarters of the former independent ministries, were essentially motor transport organizations at which serve as policy advisers to the Minister of the oblast level, in turn controlled some 2,500 Transport and his Deputy Ministers; and (c) large, separate enterprises and employed 1.3 million modally-organized operating administrations that people. Since MOT was built on the foundation of actually carry out the transportation function the former Ministry of Automotive Services, the (exhibit 2.2) In discussions with Ministry officials, Ministry's leadership and core administrative MOT's organization was likened by one to a staffs tend to have a more advanced understanding flower, in which the office of the Minister, the of motor transport issues and operations than of policy advisory staffs, and the functional staffs other transport modes. With this greater form the center, and the large modal operating understanding, however, comes some degree of administrations make up the petals. commitment to preserving traditional patterns of The USSR's command economy was organized organization, operations, and central direction. and directed through the Ministry of Planning For example, MOT has opposed plans to privatize (Gosplan), which coordinated the interaction of road transport enterprises, which have been production and service enterprises to carry out the supported by the State Commission for the economic activity in all sectors called for by the Management of State Property (GKI), to state. The large operating administrations of MOT incorporate auctioning off some fraction of the are large, virtually autonomous, vertically- fleets to provide a basis - perhaps under current integrated monopolistic corporate structures of the circumstances the only affordable basis - for type that were the principal institutions through starting new, independent, competitive trucking which the command economy of the USSR was enterprises. Resistance to this plan by MOT is in structured and operated. It is important to set forth part responsible for the slow pace of privatization a brief account of their structure for two reasons: of road transport enterprises. (a) to understand their massiveness, complexity, and the obstacles they present to change; and (b) Within the scope of road transport is urban to understand the challenge that faces the new public transport, which has also been part of the MOT as it tries to consolidate effective power organizational structure of Rosavtotrans. Policy over the various elements under its jurisdiction. proposals being considered by the Ministry While most of the modal monopolies have been at recommend that urban public transport assets be least formally integrated into the MOT, some of removed from joint passenger-freight these organizational remnants of the command organizations, except in cases involving small economy have proven too politically powerful to rural enterprises with only a few trucks and buses. be dismembered; it remains to restructure them A key to this step is the development of an into smaller, competing enterprises. understanding by MOT of the fundamental difference between trucking and urban public Railways. The railway system is the only mode transport operations and the necessity to separate over which MOT does not have at least nominal them if each is to be effectively managed. jurisdiction. Russian railways are still organized under MPS. MOT has a small planning or policy Road Construction. In the USSR, a Ministry of advisory staff for railways, but it does not Construction and road ministries in each republic exercise any real power over the railways. carried out road planning, construction, and maintenance. In 1990, Russia created a single Road Transport. The Ministry has organized agency, Rosavtodor, to construct and maintain road transport, which includes both freight and roads and also to be the organizing entity for the 53 � � .пт b и --- - � � о � ОФее о! 1he Minister N N л � 'ёд ''� гп0д Lпегдервптемаl Diviвioп пГ Diviвion оГ Diviвion оГ wrter Divicion оГ Divuion оГ Ni�hиy ыу �� Poltieвl CoRegium Caonlinвtion Сои«i1 Amomnбil. двilпид ь� оп Тгвпвроп Тгвпгроп (Ч'вlеrvвуе) Air Tnrupon Fвсепiев впд �! � Тгвп.рпм Tnn.pan Service. р. tl -_ F^• О т«ггг.г;,г � Fiгм Depury Miпiner ----- ----- м м п,� � Ceputy Miniqп Depury Мiпiмп Dгpury Mimnп ` Drpury Miniпer Depury Mminer Depury Miniпer � р - Гог Есомтiс Reform (пг Legв1 впд Гпг R.wпh впд Т«hnolnEy fnr Тnпвроп - !пг lпtегпвпопвl - (ог Мтврвпкт �ыв д впд Rкв1 А(Lin Re6v1 1пry Afiвir Devebpment Орегвгiопв А1Гвив впд Adnuniвtrвrion ву о�.lппп of ие ог.�вьоп о(Тг.пвром Developmem впд Diviвion о( деlвliппв �viгh Oivi.iпn пГSсiепее впд Coordinвunn впд Drviйun оГ Fпгиgп Р<пnnrnic - 1mplenкnbnon 5ирг'sпк 5ovia впд Т«hпаlпgу Developпкnt of Ие Rгlвпот впд Inгenution.l Drviвion о( 5осiв1 Po1iry оГ Ргопотiс RеГопп Regoп.l Саи«itв Uпified Тгвпврnп Сопрепаiп I Ргодnт. 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